War with Iran Could Raise U.S. Debt Interest by Billions

The war against Iran could cost U.S. taxpayers dearly, as investor fears of rising inflation push Washington's debt burden higher.

According to a report published by the Financial Times (FT), U.S. taxpayers could be forced to pay billions of dollars in additional interest due to the illegal and unprovoked aggression by the United States and Israel against Iran if U.S. Treasury bond yields remain elevated.

The report explains that "government borrowing costs have reached their highest levels since 2007 in the twelfth week of the U.S.-Israeli aggression against Iran, as investors have sold state debt in anticipation of higher inflation."

The yield on the benchmark 10-year U.S. Treasury bond stands at 4.58%, up from 4% prior to the start of the war, and 0.45 percentage points above the 4.13% baseline established by the Congressional Budget Office (CBO), the federal fiscal watchdog, in February 2026, the report adds.

The FT revealed that the 10-year bond yield is at its highest level since January 2025, while the 30-year Treasury bond yield reached its highest point since July 2007.

According to FT calculations based on CBO models, a yield of 4.58% during the four remaining months of the current fiscal year, which ends on September 30, would add approximately 8 billion USD to interest payments. If the 10-year bond yield were to remain at 4.58% throughout the entire 2027 fiscal year, it would translate to an increase of just over 30 billion USD in the United States' interest bill.

"Yields rise when prices fall. The CBO's baseline projections already showed that interest payments would more than double, rising from 1 trillion USD (or 3.3% of projected GDP) in 2026 to 2.1 trillion USD (or 4.6% of GDP) in 2036, due to expectations that U.S. lawmakers would make little progress in reducing the growing deficit," the report notes.

The FT mentioned that Treasury Secretary Scott Bessent had asserted that CBO projections underestimated the growth capacity of the U.S. economy under the policies of President Donald Trump, arguing that higher growth would reduce the interest burden for American taxpayers.

However, investors fear that rising long-term yields could become a self-fulfilling prophecy, as escalating borrowing costs would force governments to borrow even more to manage the expanding debt, the report indicated.

"We remain on a borrowing path that continues to rise, and in that way, a vicious cycle is created, and that is precisely what the markets are beginning to perceive," stated William Campbell, a portfolio manager at DoubleLine Investment Firm, who pointed out that the political will to address the deficit is nonexistent.

According to the report, the sharp increase in long-term interest rates has already driven up mortgage rates and materialized in a 30-year debt issuance with a 5% yield, the first since 2007.

"The auction was held shortly after the United States reported that producer price inflation had risen to 6% in April, its highest level in four years," the report adds. The spike in producer prices indicates that U.S. consumers will face rising prices in the coming months, the FT warned.

The report noted that, in response to these data, investors raised market expectations for inflation over a one-year horizon above 4%, triggering a bond sell-off that has extended throughout this week.

"Inflationary fears have been exacerbated by the perception on Wall Street that the Federal Reserve might not be sufficiently prepared to raise interest rates if necessary," the report details. At its last meeting, the Federal Reserve maintained its "monetary easing bias" despite a 50% increase in oil prices, although three Federal Reserve presidents dissented from this stance, the report concluded.

The U.S.-Israeli military action against Iran began on February 28 with airstrikes that killed senior Iranian officials and commanders. The Iranian Armed Forces and Islamic resistance movements throughout the region responded by launching daily missile and drone attacks against targets within Israeli-occupied territories, as well as against U.S. military bases and assets in the region.

Furthermore, Iran retaliated by closing the Strait of Hormuz—a strategic maritime route through which one-fifth of the world's oil transits—triggering a significant surge in the prices of crude oil and its derivatives.

In addition to reconstruction and replacement costs, it is estimated that the war has already cost Washington between 40 billion USD and 50 billion USD. Meanwhile, economists assert that the economic toll of the constraints caused by the closure of the Strait of Hormuz could reach astronomical figures.