US Bonds Bounce Back as European Political and Fiscal Pressures Drive Safe-Haven Demand

US Treasuries staged a strong recovery from a severe global bond selloff as mounting financial pressure in Europe drove investors toward safe-haven assets, pulling 10-year yields down from a 24-year high.

Market Shifts

The bond market bounceback gained momentum on Thursday as growing anxiety over France's political and fiscal stability pushed euro-area risk premiums higher. Long-term UK bond yields also jumped past 6% for the first time since 1998, with the 30-year yield hitting that threshold amid a slump that saw global government bonds post their worst quarter since 2024. In the US, safe-haven buying dropped the two-year Treasury yield by as much as 13 basis points to 4.75%, heading for its biggest decline since August 2025. Swap spreads plunged quickly, indicating an unwinding of crowded positions built up over recent weeks.

Factors and Reactions

Izaac Brook, US rates strategist at RBC Capital Markets, noted that market movements were driven entirely by overseas yields rather than US fundamentals, as investors rushed into safety. The broader downturn has been fueled by a weeks-long global bond selloff driven by an oil-price shock from the US-Iran war, massive government borrowing, resilient economic growth, and heavy debt issuance for artificial-intelligence investments. Thursday's drop in short-term US yields was further aided by a weaker-than-expected manufacturing report showing economic cooling, which caused traders to scale back expectations for steep interest-rate hikes by the Federal Reserve.

Policy Moves

Federal Reserve Vice Chair Philip Jefferson stated that policymakers might require more time to determine their next steps, while traders priced in roughly a 25 percent chance of an interest rate increase during the month. In Washington, the Trump administration attempted to counter the selloff by increasing buybacks of longer-dated bonds, including a Treasury Department operation on Thursday that repurchased $6 billion in debt maturing in 10 to 20 years. Meanwhile, in Europe, the yield gap between Italy and Germany's two-year bonds nearly doubled to 55 basis points in the largest daily jump since 2020, and France's equivalent gap rose up to 22 basis points.

Context

Global bond markets are deeply interconnected, meaning financial stress and rising government debt burdens in major European economies routinely trigger capital flows into safer US government securities. Safe-haven demand during international market turbulence often temporarily overrides domestic economic data in determining short-term bond price movements. Investors now look ahead to upcoming employment reports to gauge future monetary policy decisions.