French Turmoil Pressures Global Bond Markets

Former President Trump is reportedly pressuring President Zelensky to halt attacks on Russian refinery facilities.

The shortage of refined oil is causing global price increases and sharp rises in sovereign bond yields across various countries, leading to budget problems and protests in several nations, including France.

France is facing difficulties in fiscal management as pension and social security costs exponentially increase due to an aging population.

The country is confronted with a situation where it must cut education budgets to secure social welfare funds, while rising debt exacerbates interest burdens, leading to a dilemma of national default risk or welfare cuts.

The French public education system is suffering from poor conditions, including overcrowded classrooms, dilapidated facilities, and a shortage of teachers. These grievances led to teacher strikes and high school student protests, which began in rural schools outside Paris.

Social unrest escalated, with over 1,000 high schools nationwide participating in protests and 222 schools being blockaded. There was even an incident where a 15-year-old boy lost his hand due to excessive police force.

France's national debt currently stands at 119% of GDP and is projected to rise to 121% next year, reaching a level similar to that of the United States.

Both left and right-wing parties, mindful of votes ahead of the next presidential election, are refusing to accept austerity budgets, hindering effective fiscal tightening.

This increases the risk of a downgrade in France's national credit rating and a surge in bond yields.

The European Central Bank (ECB) has explicitly stated it is not prepared to intervene to lower France's borrowing costs.

The ECB maintains that France's problems stem from political uncertainty and must be resolved by France itself, leading to the French fiscal crisis causing euro weakness and capital outflows.

The spread between French and German government bond yields has widened to 1.5%, reaching its highest level in 14 years, creating an abnormal situation where French yields are higher than those of Italy and Greece.

Major buyers of U.S. Treasuries, such as the UK, Belgium, and Norway, are raising interest rates to defend their currencies and provide liquidity.

This increases the likelihood that existing buyers of U.S. Treasuries will become sellers, potentially leading to global interest rate hike pressures.

With difficulties in cutting budgets due to war costs, AI development investments, and social welfare expenditures, the U.S. 10-year Treasury yield has reached 5.2%, with the market projecting a possibility of reaching 6%.

With Russian crude oil being sold at high prices, the decline in oil prices is limited, and oil price surges due to geopolitical risks like the Strait of Hormuz continue.

If oil prices do not fall, it is difficult for sovereign bond yields to decrease, acting as one of the fundamental causes of global interest rate hike pressures.

Japan's 10-year government bond yield has surged 50% from 2% to over 3% in just one year, raising the possibility of further rate hikes and bond sales by Japan.

To counter this situation, the U.S. also needs to maintain a high-interest rate strategy to preserve its interest rate spread with Japan, and South Korea is also expected to be affected by the global trend of rising interest rates.

Despite these conditions, an investment strategy focused on sectors with proven profitability and growth potential, such as AI infrastructure, remains effective.