Concerns over fiscal spending triggered by the US-Iran war are sweeping the global bond market, leading to a new round of sell-offs in long-term government bonds.
On Friday, the yield on 30-year US Treasuries climbed to nearly 4.90%, reaching a nearly one-month high. Since the outbreak of the war on February 28, this yield has risen by more than 20 basis points, erasing all gains in US Treasuries for the year. The Bloomberg index tracking US Treasury returns has seen its year-to-date yield nearly approach zero.
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This sell-off is not unique to the United States. From the UK to Germany, from Australia to Japan, global bond yields have surged across the board, putting pressure on long-term government bonds.
Investors are concerned that as the costs of the war continue to rise, governments will have to borrow heavily to cover defense spending and subsidize households affected by rising energy prices. This outlook, combined with inflationary pressures from rising oil prices, poses a dual threat to the fixed income market.
<h2>Dual Pressure of Fiscal and Inflation on Long-Term Rates</h2>
The rise in long-term yields is driven by two forces: inflation expectations and concerns over fiscal deterioration.
Notably, the yield on 30-year Treasury Inflation-Protected Securities (TIPS) rose by 7 basis points this week—meanwhile, short-term real rates fell due to expectations of slowing growth—this divergence indicates that market concerns over long-term fiscal sustainability have surpassed mere economic cycle considerations.
&#34;Long-term rates are a fiscal story and a government credibility story,&#34; said Gang Hu, managing partner at Winshore Capital Partners. &#34;It reflects the market's expectation that Trump will need to spend money to pay for the war and subsidize consumers facing high oil prices.&#34;
The US Congress is currently discussing an additional war appropriation of up to $50 billion, but the government has yet to disclose specific cost estimates for military actions. Meanwhile, the US budget deficit has remained around $1 trillion over the five months ending in February, and a Supreme Court ruling overturning trade tariffs has abruptly eliminated a source that could have provided hundreds of billions in revenue for the treasury.
&#34;This is happening at a point where tariff revenues are reversing, and tariffs themselves are inflationary, and war is also inflationary,&#34; said Matt Eagan, a portfolio manager at Loomis, Sayles &amp; Co., which manages over $430 billion in assets. &#34;This will only exacerbate the deficit.&#34;
A $22 billion auction of 30-year US Treasuries on Thursday received decent demand after a significant rise in yields, but market participants are not optimistic about the outlook. &#34;I don't see any appeal in 30-year Treasuries until yields break 5%,&#34; Eagan added.
<h2>Global Borrowing Surge, Bond Market Pressure Spreads</h2>
Fiscal pressures are not limited to the United States. In Europe, governments are facing dual pressures of higher defense spending and potential energy subsidies. European Commission President Ursula von der Leyen proposed several measures this week, including a cap on gas prices. According to Andrzej Szczepaniak, a senior European economist at Nomura Securities, European governments may replicate the response path taken during the 2022 energy crisis by financing crisis expenditures through joint EU bond issuance
This will create structural pressure on the Eurozone bond market.
Asia is also finding it difficult to remain unaffected. Countries like Australia and Singapore have successively increased their defense budgets, and Japan's defense spending is expected to reach a historic high this year. Carol Kong, a strategist at Commonwealth Bank of Australia, pointed out that the Iran conflict may further elevate the long-term spending pressures on Asian governments, complicating fiscal consolidation efforts. &#34;The rise in inflation expectations will also push up bond yields, and Asia, including Japan, is no exception.&#34;
Chris Arcari, head of capital markets at Hymans Robertson, noted that compared to the energy crisis triggered by the Russia-Ukraine conflict in 2022, governments currently have more limited fiscal space, with both debt burdens and interest costs being higher. The bond market may be less willing to accommodate such large-scale fiscal expansions this time, at least demanding higher real yields as compensation.
Investors generally believe that if the conflict continues and governments increase spending, the ongoing expansion of global government bond supply will keep long-term rates under pressure, and the demand for higher risk premiums on long-term bonds will become the new norm in the market

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The deterioration of fiscal conditions and inflationary pressures are simultaneously squeezing the global bond market. The yield on 30-year U.S. Treasuries has surged to nearly 4.90%, erasing all gains made this year; long-term interest rates are under pressure across countries from Europe to the Asia-Pacific. The U.S. $50 billion war funding, trillion-dollar deficit, and sudden loss of tariff revenue—multiple negative factors are compounding, and the market has begun to price in long-term fiscal sustainability, with "5% being attractive" likely becoming the new normal

- Concerns over financial expenditures from the U.S.-Iran war are causing a global sell-off in long-term bonds, with 30-year U.S. Treasury yields rising nearly to 4.90%. 
- This yield increase reflects fears that governments will heavily borrow to fund defense and subsidize households affected by rising energy prices, contributing to dual pressures of inflation and fiscal deterioration. 
- Global borrowing pressures are not isolated to the U.S.; countries worldwide face similar challenges, with expectations of higher long-term rates as a new market norm due to ongoing conflicts and increased government spending.

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The Middle East conflict triggers global "deficit panic": 30-year U.S. Treasury yield approaches 4.9%, and this year's bond market gains have all been wiped out!