Somebody Always Pays

European long bonds are back at 2011 levels. The move is fast. The bill is slow.

The German 10Y Bund touched 3.36 percent this week, the highest since 2011. Italy’s BTP went through 4.18. France sold 30Y paper at a level last seen the month Lehman went under.

The instinct is to read this as a European problem. It isn’t. Japan’s 10Y crossed 3 percent for the first time since 1996. UK 30Y costs are at 1998 levels. The US 30Y is back above 5.2, roughly where it sat before the Treasury doubled its buybacks in August, which tells you what that intervention bought: about two weeks.

When every developed curve steepens at the long end at once, the cause isn’t domestic politics. Something global is being repriced, and it is duration.

Why

Energy inflation is the visible reason. Eurozone inflation hit 3.3 percent in August and the market now prices two more ECB hikes by December. Six months ago the argument was about where the cutting cycle would stop.

Supply is the invisible one. Governments and companies will borrow a record 29 trillion dollars globally this year, and Germany, historically the brake on European issuance, is now part of the problem: the Merz rearmament plan is deficit funded, and Bund yields started climbing the week it was announced.

Third, the buyer who didn’t care about price has left. The ECB held over five trillion euros of bonds in 2022 and has been letting them roll off since. Every euro that matures is a euro someone else has to hold at a price they actually like.

The market is charging for duration again. The decade in which it didn’t was the anomaly.

Who pays

Not who you’d guess, and not when.

Treasuries pay slowly. Italy refinances around 385 billion euros this year against an average debt life of just under seven years. Only a seventh of the stock reprices annually, so nothing snaps, and nothing improves quickly either. The average yield on new issuance is 2.93 percent against a decennale above 4. That gap is next year’s interest bill.

Banks pay mostly in theory. Unrealised losses sit in bond portfolios held at amortised cost, but they never reach the P&L unless a bank is forced to sell early, which only happens once something else has already broken. Higher rates are still good for margins.

Companies pay on a delay. Europe’s maturity wall falls in 2026 and 2027. Firms rolling debt now borrowed at coupons that no longer exist. Moving from 1.5 percent to 4.5 doesn’t bankrupt anyone healthy, but it removes three points of margin permanently, and management will spend three years explaining it.

Households pay immediately. Three month Euribor moved ahead of the ECB, not behind it. On a standard variable mortgage that’s about fifty euros a month more by early next year. Nothing in a spreadsheet, quite a lot in a budget. The share of new Italian mortgages taken at a variable rate fell from 9 to 6 percent in one quarter.

Italy versus France

Italy looks good in the comparison. Debt to GDP has fallen from 154 percent in 2020 to around 139. France went the other way, running a deficit above 5 percent into a presidential election with no budget majority. The BTP Bund spread, 251 basis points in 2022, sits near 84.

Two caveats.

A spread is relative, a coupon is absolute. Italy converged with France partly because France got worse. A BTP at 4.18 with an 84 basis point spread costs the Treasury more than a BTP at 3.60 with a spread of 150. The spread is the story journalists tell. The yield is the one the budget pays.

And the fiscal narrative is drowned out by oil. ING found the oil price explains most of this year’s move in the France Italy spread. At these levels, a trade built on relative fiscal fundamentals is a bet on the Strait of Hormuz wearing a suit.

What it means for equities

Discount rates are the most boring variable in a valuation and the most powerful, and they’ve moved a long way. You don’t need a view on any single company to know that cash flows arriving after year ten are worth less than they were.

Two questions are worth asking about anything you own. When does its debt mature, and at what rate was it issued. That isn’t sophisticated analysis. It’s the analysis that stopped being necessary for ten years and just became necessary again.