Following up on the previous post about US Treasuries.

It’s quite symbolic that The Economist recently featured a cover asking “Will Bonds Blow Up?” and warning of an impending sovereign debt crisis.

There are growing concerns that it’s becoming increasingly expensive for the US to borrow money. Investors are demanding higher and higher yields amid massive debt, budget deficits, and inflation risks. But there’s an interesting paradox here. While we’re focused on the US, the debt problem could blow up much sooner somewhere else entirely.

Take France, for example. It’s the second-largest economy in the European Union. Its public debt is approaching 120% of GDP this year, the budget deficit is around 5.4%, and 10-year bond yields have nearly reached 5%, their highest levels since 2002. For comparison, when Greece’s sovereign debt crisis began in 2009, its debt stood at around 127% of GDP. To be fair, its budget deficit was much worse, exceeding 15%. So France today is certainly not Greece in 2009, but some of the numbers are starting to look uncomfortably familiar.

And this is where things get really interesting. If France’s problems turn into a full-blown debt crisis, we’re no longer talking about a small country on the periphery of Europe. France accounts for nearly 16% of the EU’s entire economy. A crisis of that scale would almost certainly push investors to look for the safest and most liquid places to park their capital.

Some money is already flowing out of French bonds and into German bonds, the Swiss franc, and the US dollar. If the situation becomes truly systemic, US Treasuries could once again become an obvious destination. Demand for them would rise, bond prices would go up, yields would fall, and suddenly it would become cheaper for America to borrow.

And that’s the key takeaway. There are no perfect assets and no perfect countries in the markets. Capital always goes where it sees the best available alternative. That’s why a scenario in which Europe experiences a debt crisis before the US could actually turn the dollar and US Treasuries into beneficiaries of the very crisis that everyone in America is so worried about right now. For investors, that’s yet another reason not to bet everything on a single scenario and to keep a close eye not just on the US, but also on what’s happening with European debt.