The global economy is facing a growing risk of a financial market crisis as rising interest rates collide with record-high debt levels. The United States Treasury market, a key benchmark for borrowing rates worldwide, has seen its 10-year bond yield climb by 100 basis points over the past year to nearly 5 percent. This surge is driven by investor concerns over the US public finance outlook, with budget deficits projected to exceed 6 percent of GDP indefinitely. By 2029, the US public debt-to-GDP ratio is expected to surpass levels seen at the end of World War II.
The situation is further complicated by a declining foreign appetite for US government bonds, particularly from Asian and European central banks. These banks are reducing their Treasury holdings due to fears of potential US financial policy weaponization. This shift has increased the Treasury's reliance on highly leveraged hedge funds to meet its substantial borrowing needs.
Meanwhile, France, Europe's second-largest economy, is teetering on the brink of a bond market crisis. The spread between French and German bond yields has widened to 165 basis points, the highest since the 2010 eurozone debt crisis. France's public debt stands at $4 trillion, with a budget deficit of 5.5 percent of GDP and public debt at 120 percent of GDP. Political and social unrest ahead of next year's presidential election makes meaningful spending cuts unlikely.
Rising interest rates pose additional threats, including a potential stock market correction. The US stock market is currently characterized by near-record valuations, high concentration, and margin debt that has surged by over 30 percent in the past year to $1.5 trillion. Higher rates could also slow the artificial intelligence investment boom, which has contributed significantly to US GDP growth this year. Additionally, defaults in the commercial real estate and private credit markets could accelerate as higher interest rates make previously viable projects unprofitable.