The war in Iran, now in its fifth week, is causing concern in the US bond market. The lower demand for Treasury bonds, as evidenced in recent auctions, has forced yields to rise.

This contrasts with the previous month, when a Treasury offering saw the highest demand in the history of 30-year auctions. The armed conflict, which could extend into the fall or even next year, is exacerbating the US debt situation.

Rising oil prices, fueled by the conflict, are raising inflation expectations and postponing potential rate cuts by the Federal Reserve. At the same time, the cost of the war is worsening the debt situation, with the Pentagon requesting $200 billion from Congress.

This adds to the need to replenish munitions and repair damage to military assets. Volatility in the bond market has increased, reflecting uncertainty about the US fiscal situation, the risk of inflation, and the war.

RSM Chief Economist Joseph Brusuelas noted that the US Treasury bond market has responded to the war in the Middle East, assessing the impact of the energy shock and the war's effect on fiscal imbalance and inflation. The MOVE index, which tracks volatility in the Treasury market, has reached levels consistent with price instability and policy dysfunction.

The situation could trigger greater stress in debt markets, already pressured by concerns about private credit. The term 'bond vigilantes', coined by Ed Yardeni in the 1980s, is once again relevant given the increase in debt.

The federal government must refinance $10 trillion of debt coming due in the next 12 months, while the budget deficit is already on track to hit $2 trillion, according to Torsten Slok, Apollo's chief economist. In addition, the government faces greater competition for bond investors' dollars.

Slok warned about the growing supply of corporate debt, which could make borrowing more expensive for the administration. Total gross corporate bond issuance in 2026 could be around $2 trillion, which, added to the investment-grade supply, will put upward pressure on rates and credit spreads.

The need for additional spending to finance the war would increase US debt, sparking a bond market selloff as investors require additional compensation to cover potential losses, according to Brusuelas. Long-term rates, such as 30-year mortgages, are based in part on the US 10-year benchmark yield.

Despite the challenges posed by the war and rising debt, the bond market remains a crucial factor in the economy. The current situation highlights the importance of fiscal stability and debt management in a context of geopolitical and economic uncertainty.