Europe may be able to escape the "debt cycle" in the bond market, but the United States is unlikely to be spared.

Notice that global long-term bond yields soared last week, sparking concerns in the market about government deficit financing capabilities. Europe's prudent fiscal policy may prevent this "doom loop" in 2026, but there is almost no reason to believe that the United States can be so lucky. In recent years, Atlantic China Welding Consumables, Inc. bond yields on both sides of the Taiwan Strait have continued to rise. While initially due to central bank interest rate hikes pushing up real yields, bond yields have continued to rise over the past 12 months, even as central banks have begun easing policies. In fact, last week the US 30-year Treasury bond yield reached a high of 4.99%, while the UK 30-year Treasury bond yield rose to 5.69%, the highest since 1998. The market is concerned that persistently high long-term bond yields will exacerbate the difficulty of governments repaying ever-expanding debts, potentially leading to a crisis. However, the share of interest payments in GDP is still far lower than in the 1990s, so a government debt crisis in advanced economies still seems distant. But if bond yields continue to rise, businesses and governments will be forced to cut investments as debt payments consume a growing share of income. This could lead to a vicious cycle: reduced investment lowers economic growth, tax revenues decline, further widening the deficit. European Debt Cycle The European bond market has entered the first stage of a worrying bond yield cycle - government deficits expanding, forcing bond yields to rise. This is particularly evident in France, where the government faces a 5.8% budget deficit and struggles to pass a budget bill. Stability in the European bond market in the long term means controlling deficits, which may require raising taxes. As cutting spending is almost impossible in the context of Europe's attempts to strengthen defense and infrastructure. However, many investors fear that raising taxes could slow down consumption, business investment, and GDP growth, setting off a destructive bond yield cycle. But there is reason to believe that this cycle will be broken in 2026, even if tax increases are required. This is because investments in infrastructure and defense will accelerate in Europe in 2026, which typically have a large fiscal multiplier effect. That is, the output generated is often greater than the cost, and benefits typically manifest within 1-3 years of the initial investment. As tax revenues are mainly driven by GDP growth, if economic activity accelerates in 2026, especially in conjunction with tax increases, the deficit is expected to narrow. In short, this is a way to stop the bond yield cycle: the government implements prudent policies to reduce the deficit, thereby lowering the risk premium on government bonds. Of course, the market knows that such prudent policies can sometimes be insufficient. American Exceptionalism In 2025, there were numerous articles discussing the end of American exceptionalism, but in one aspect, America still stands out. Unlike European countries, the United States seems to have no interest in reducing the deficit. Instead, the US is expected to maintain a sustained deficit share of 6.5% or higher. Unfortunately, this is likely to lead to an oversupply of US treasuries, pushing up treasury yields, especially long-term bonds. If long-term bond yields continue to rise, the cost of financing for business capital expenditures (including the massive expected investments in artificial intelligence) will become more expensive. If some AI investments are cut, how will the cloud company profit growth that investors have priced in be achieved? The above scenario does not even consider the possibility of inflation and slowing growth resulting from the trade conflict between the US and China. In other words, the fiscal imprudence of the new US budget plan may not be enough to maintain the US bond yield cycle. So what can stop it? The Fed may directly engage in "yield curve control" to lower long-term yields; international investors may ignore economic realities leading to an unmet demand for US treasuries; or the US government may reduce the deficit. Among these potential solutions, only the first - yield curve control - seems possible, but it would represent a significant shift in US monetary policy. Almost a year ago, despite the central bank's shift to easing, long-term bond yields continued to rise. While Europe may break this trend in 2026, the same may not be true for the US. If this divergence becomes a reality, it could have significant implications for the stock market, especially for growth stocks that are more sensitive to long-term bond yields than value stocks. The outlook for US growth stocks is therefore dimming, while European growth stocks may soon see a glimmer of light at the end of the tunnel.