War Expenditures Cause Decline in Long-Term Government Bonds Amid Concerns Over Budget Deficits

Global Bond Markets React to Rising Costs of Iran Conflict

As the conflict involving Iran intensifies, investors are increasingly worried about the financial burden it may place on governments, particularly the United States. These concerns have led to a decline in long-term government bonds, reflecting fears that the war will further strain already stretched national budgets.

The yield on 30-year US Treasury bonds has surged to nearly 4.90%, marking the highest level in a month. This jump is driven by expectations that military expenditures will widen the US fiscal deficit.

Top Stories from Bloomberg

Worries about the fiscal consequences of the war are not limited to the US. Bond yields have climbed in the UK, Germany, Australia, and Japan, as investors anticipate increased borrowing to finance defense and offset higher energy costs for consumers.

For those holding bonds, the war’s expenses add to anxieties about already significant government deficits. This has led investors to seek higher returns on long-term debt, especially as rising energy prices fuel inflation, creating a challenging environment for fixed-income markets.

“Long-term interest rates are a reflection of fiscal policy and government credibility,” explained Gang Hu, managing partner at Winshore Capital Partners. “There’s an expectation that Trump will need to boost spending both for the war and to help consumers manage higher oil prices.”

Since the US, Israel, and Iran became embroiled in conflict on February 28, global markets have experienced significant volatility. Many investors are now bracing for a drawn-out war. While President Donald Trump has suggested the conflict could end soon, he has not provided a clear timeline, stating, “we’re not finished yet.”

Investor Sentiment and Treasury Auctions

The upcoming $22 billion auction of 30-year Treasury bonds will gauge demand for these securities. Since the conflict began, yields across all maturities have risen, as investors weigh the inflationary effects of surging oil prices.

Initially, the increase in US yields was most pronounced in shorter-term bonds, narrowing the gap between short- and long-term rates. This pattern indicates that investors view the oil price shock as a short-term inflation risk, influencing expectations for Federal Reserve policy.

Recently, however, longer-term bonds have lagged behind. This week, 30-year yields have climbed by 13 basis points, compared to a 9 basis point rise for two-year notes, highlighting growing concerns about the long-term fiscal impact of the conflict.

Global Fiscal Pressures and Policy Responses

“Financing the war and slower economic growth are weighing on investors’ minds,” noted Ruben Hovhannisyan, a portfolio manager at TCW’s fixed income group.

Although the US budget deficit has narrowed somewhat, it still reached about $1 trillion in the five months through February. Investors are also considering the effects of a Supreme Court decision that eliminated tariffs, which had previously generated significant government revenue.

“With tariffs being rolled back and the inflationary effects of war, the deficit is only set to grow,” said Matt Eagan, portfolio manager at Loomis, Sayles & Co.

Rising Debt and Limited Fiscal Space

During the 2022 energy crisis sparked by Russia’s invasion of Ukraine, governments worldwide ramped up spending. Now, with higher debt levels and increased interest costs, bond markets may be less willing to finance further fiscal expansion without demanding higher real yields, according to Chris Arcari, head of capital markets at Hymans Robertson.

European leaders are also preparing for the possibility of increased defense budgets and energy subsidies if oil prices remain high. European Commission President Ursula von der Leyen has proposed measures such as capping gas prices. Nomura economist Andrzej Szczepaniak suggests that, as in 2022, the EU could respond with joint debt issuance to support member states.

Asia faces similar challenges. Countries from Australia to Singapore have boosted defense spending, and Japan is planning record expenditures this year. The Iran conflict could force governments to increase spending further, complicating efforts to rein in deficits, says Carol Kong of Commonwealth Bank of Australia.

“Rising inflation expectations are likely to push bond yields higher across Asia, including in Japan,” Kong added.

Even in China, where markets have been relatively stable, yields on long-term bonds have reached their highest levels since 2024 due to inflation concerns.

A global surge in government borrowing could put additional strain on the $31 trillion US Treasury market if investors seek better returns elsewhere.

If the conflict continues and governments respond with more spending, investors say they will keep demanding higher risk premiums for long-term bonds.

“The supply of Treasuries will rise just as the US needs to attract buyers,” said Loomis Sayles & Co.’s Eagan. “I don’t see much interest in 30-year bonds unless yields exceed 5%.”

Reporting assistance by Will Standring.

Most Popular from Bloomberg Businessweek

©2026 Bloomberg L.P.