After the United States, European long-term government bond yields also surge

Impact of rising government debt and the effects of pension reform in the Netherlands, the largest in the EU

UK, France, Germany government bond yields at highest levels in 14 to 27 years

Following the United States, European long-term government bonds are also plunging across the board. With government debt levels rising across the board, the situation in the United States is attributed to concerns over the independence of the Board of Governors of the Federal Reserve and long-term inflation, while in Europe it is seen as being compounded by political instability and the effects of the Netherlands' pension system reform.

On the 2nd (local time), the US 30-year Treasury yield rose 6.8 basis points (1bp=0.01%) to 4.986% in the London market. The benchmark 10-year Treasury yield also rose 7bp to 4.296%. The 2-year Treasury yield, which had been declining on hopes of a Fed rate cut in September, also rose 4bp to 3.664%. Bond prices and yields move in opposite directions.

Long-term government bond yields in major European countries also plunged across the board that day.

The UK's 30-year government bond yield rose 6 basis points (1bp=0.01%) to 5.697%. This is the highest since 1998. France's government bond yield reached 4.513%, the highest since 2009, and Germany's government bond yield rose to 3.41%, the highest since 2011 during the European debt crisis.

Kenneth Brooks, head of corporate FX and rates research at Société Générale, warned, "The European market faces the risk that a surge in new bond issuance over the coming weeks could deepen the global bond sell-off over the long term."

Bond issuance in Europe is planned to exceed 100 billion euros (about 163 trillion won) in September and October.

A larger factor is that the impact of reforms to the Netherlands' pension system, the largest within the European Union (EU), has begun to appear. Although the Dutch economy accounts for only 7% of the eurozone, it holds more than half of the eurozone's total pension savings. The Netherlands' holdings of European bonds amount to about 300 billion euros (487 trillion won), the largest in the EU.

As the Netherlands reforms its pension system toward so-called lifecycle investing, it is being designed to readjust exposure to interest rate movements and the proportion of hedging products.

According to Bloomberg, about 36 funds will switch to the new system from January 1 next year, and the remaining funds will transition sequentially every six months until January 2028. Since bonds will be rebalanced more frequently, they may be exposed to interest rate changes more often, and large-scale liquidation of hedge positions could affect the bond market.

According to ABN AMRO, Dutch pensions are estimated to be most exposed to German, French and Dutch government bonds.

Over the past few weeks, the forward volatility indicator for 30-year euro swaps has risen. Strategists at ING Group analyzed that this change is partly due to the overhaul of the Dutch pension system.

In France, moreover, the possibility that the no-confidence vote decided last week by Prime Minister Bayrou will be held next week, increasing the likelihood of the government's defeat as opposition parties oppose spending cuts, has fueled the fall in long-term government bonds. In the UK, taxes are expected to be raised in the autumn budget to meet fiscal targets.

Meanwhile in the United States, long-term government bonds have been rising since last week amid growing doubts about the Fed's ability to manage inflation in the medium to long term after President Trump sought to dismiss Fed governors and fill the Fed with allies.

Jeong-A Kim, guest reporter kja@hankyung.com