BELGRADE, Oct. 11 (Xinhua) -- The benchmark 10-year U.S. Treasury yield climbed to around 5.36 percent during the week of Oct. 5-9, reaching its highest level in nearly 24 years. European government bonds also came under pressure. Britain's 10-year government bond yield rose to 5.527 percent, its highest since 2007, while the corresponding French yield reached 4.969 percent, remaining near multi-decade highs.
Analysts and financial institutions say persistently elevated U.S. Treasury yields could further strain Europe's economy through higher sovereign borrowing costs, cross-market financial risks and a stronger dollar.
HIGHER BORROWING COSTS COMPOUND DEBT PRESSURES
One major concern for Europe is that rising U.S. Treasury yields could push up government borrowing costs at a time when several European economies are already facing substantial debt burdens and refinancing needs.
Research by the European Stability Mechanism (ESM) shows that changes in U.S. Treasury supply can spill over into European sovereign bond markets, particularly through German government bonds, which serve as a key benchmark for borrowing costs across the euro area.
According to the ESM, an unexpected increase of approximately 25 billion U.S. dollars in net Treasury supply could raise the yield on 10-year German government bonds by around 10 to 15 basis points, with the impact lasting approximately 10 trading days.
The mechanism is relatively straightforward. Higher U.S. Treasury yields can make American government bonds more attractive to international investors, potentially reducing demand for European sovereign debt and pushing European yields higher.
For heavily indebted European governments, even a relatively modest increase in borrowing costs can become significant when large amounts of existing debt need to be refinanced.
European Central Bank data showed that, as of August 2026, the euro area's outstanding long-term government debt securities with a remaining maturity of one year or less totaled approximately 997.85 billion euros (about 1.17 trillion U.S. dollars), equivalent to 6.25 percent of the region's GDP.
This means that a substantial volume of government debt is approaching maturity, exposing public finances to prevailing market interest rates as governments refinance their obligations.
FINANCIAL LINKAGES HEIGHTEN MARKET RISKS
Beyond government borrowing costs, Europe's substantial holdings of U.S. financial assets expose its investors to potential losses from volatility in American bond markets.
Bond prices generally move inversely to yields, meaning that a sharp rise in U.S. Treasury yields could reduce the market value of bonds held by European investors. According to U.S. Treasury International Capital (TIC) data published by the Federal Reserve Bank, euro-area investors held approximately 1.95 trillion U.S. dollars in U.S. long-term and short-term Treasury securities as of July 2026.
Rolf Strauch, chief economist of the European Stability Mechanism, has warned that close financial links between Europe and the United States leave European investors vulnerable to fluctuations in U.S. stock and bond prices.
The ESM estimates that euro-area bond funds and money market funds hold around 1 trillion euros in bonds issued by U.S. entities, approximately 37 percent of which are U.S. government securities. A sharp repricing of these assets could trigger investor redemptions, forcing funds to sell securities and potentially amplifying market volatility.
Financial risks could also spread through highly leveraged trading. In its April 2026 Global Financial Stability Report, the International Monetary Fund noted that some offshore hedge funds engaged in U.S. Treasury basis trading have become increasingly active in euro-area government bond repurchase markets.
If market volatility raises financing costs or margin requirements, these funds could be forced to unwind positions and sell assets. As some institutions operate in both U.S. and European sovereign debt markets, such deleveraging could transmit selling pressure across borders and amplify volatility in European bond markets.
STRONGER DOLLAR COULD ADD TO INFLATION PRESSURES
A further concern is that elevated U.S. Treasury yields could support the dollar by attracting international capital into dollar-denominated assets, potentially increasing Europe's energy and raw material import costs.
The dollar index has recently approached an 18-month high, while the U.S. currency has gained approximately 5 percent against the euro since the beginning of the year.
Uto Shinohara, a senior investment strategist at Mesirow Currency Management, has noted that U.S. Treasury yields remain attractive relative to those in many other developed economies, supporting demand for dollar assets as the euro faces pressure.
For European importers, exchange-rate movements can have direct economic consequences.
Because internationally traded energy commodities are commonly priced in dollars, a stronger U.S. currency means European buyers may have to pay more in euro terms for the same quantity of imported energy, even if the dollar-denominated commodity price remains unchanged.
Research by the Dutch central bank indicates that international energy prices and exchange rates jointly influence energy costs in the euro area, with currency movements potentially feeding into domestic inflation through business production costs.
The risks are particularly relevant at a time when Europe is already facing renewed energy-driven inflation pressures.
Eurostat data released on Oct. 2 showed that euro-area energy prices rose 18.8 percent year-on-year in September, accelerating from 14.3 percent in August. Olli Rehn, Bank of Finland governor and a member of the ECB Governing Council, has warned that rising energy prices are bringing the euro area's inflation outlook closer to the central bank's adverse scenario. ■