Today, it got there.

France’s 10-year yield closed at 5.08%. The U.S. 10-year closed at 4.96%.

France now pays more to borrow than the U.S. government.

And its gap over Germany widened to 1.75 percentage points, the widest since 2011. Italy’s premium over Germany also widened — to 1.25 percentage points, from 1.16 yesterday.

So, this is money moving from the weaker euro zone government bonds and running into relative safe-havens (German and U.S. government bonds).

And the signal given by the bond market in Europe is manifesting in the banks. 

European bank stocks fell 4.2% today, their worst day since March. BNP fell 4.9%. Societe Generale fell 4.5%. UniCredit fell more than 4%.

Why the banks?

As we discussed in my note earlier this month, “European banks are among the biggest owners of their own governments’ bonds. When those bonds fall, the banks fall with them.”

So who holds the most?

Italy’s banks. They hold €419 billion of Italian government bonds. That’s more than they held at the height of the debt crisis.

Across Europe, banks hold €4.5 trillion of government debt. That’s more than two and a half times their core capital. And it’s up €1.4 trillion since 2022.

And despite the debt crisis of just 15 years ago, these government bonds on the balance sheets of European banks are treated as risk-free. The bank holds no capital against them. That gives the European banks the illusion of being well capitalized. 

Meanwile, the big bond investor Jeffrey Gundlach (of Doubleline Capital) posted a chart last Friday showing the cost of French 10-year government debt surpassing the cost of French investment-grade bank debt.

A bank can’t be safer than the government that stands behind it.

So, either French government bond yields come down, or French bank debt reprices higher.

The latter is more likely, which supports the direction of European bank stocks (lower). 

With the above in mind, back in the summer of 2025, at the ECB's annual forum in Portugal, economists and policymakers held a panel discussion stressing the need to break the sovereign debt-bank "doom loop."

This was publicly admitting that the doom loop still existed. Thirteen years after Mario Draghi intervened to avert sovereign debt defaults and a collapse of the European Monetary Union, the vulnerabilities still exist (haven't been fixed).

The problems from 2012 remain.

The difference is the backstop.

Draghi’s threat worked in 2012 because the United States was anchoring a coordinated global policy. As we discussed over the past year, the ECB backstop only works when the major central banks are coordinating. This time, central banks (namely, the Fed) are no longer working in coordination.

We get a Moody’s review on France’s credit rating tomorrow.

A downgrade would make France’s borrowing more expensive still, and put more pressure on the banks that lend to it.

So, the energy market has tightened. The bond market is strangling. And the pain is beginning to spread to the banks.