President Donald Trump’s war with Iran has created an economic “doom loop” that experts warn has “no end” in sight. Now, according to new reporting from CNN, “yellow lights are flashing in the most important market on the planet: The US bond market.” As the bond yields skyrocket, investors are selling fast, wreaking chaos across the economy.
As CNN explains, the situation is being driven by a number of contributing factors, at the core of which is the war with Iran, which is “driving up US defense spending and the cost of oil, gasoline, diesel and jet fuel. That energy spike is reinforcing inflation worries in a bond market already nervous about America’s $40 trillion mountain of debt. The yield on the benchmark 10-year Treasury, which is a measure of how much the US government pays to borrow more money, climbed on Wednesday to the highest level in nearly three years. The bond market stress will make it more expensive for consumers to get a mortgage, for businesses to borrow and for Washington to pay the bills.”
According to CNN, this situation has fueled growing concern that the economy has entered a “doom loop, where the more the war intensifies, the more it will spook the bond market and slow the economy and stocks.” As Hardika Singh, economic strategist at Fundstrat Capital, put it, “It feels like there is no end to the inflation problem, the war or the deficit in the near term.”
The war has caused bond yields to rise for two main reasons: because the U.S. has been forced to borrow more to cover defense spending, and the inflation it’s caused in general. And the longer the war goes on, the worse the problem will get. As Art Hogan, chief market strategist at B. Riley Wealth Management, told CNN, “This becomes a circular argument unless and until there is a credible way to get out of this war.” David Kelly, chief global strategist at JPMorgan Funds, agreed, saying, “Sadly, it looks like the world has entered a new set of forever wars – and that’s very expensive.”
To make matters worse, notes CNN, “Higher bond yields typically slow the economy by raising the cost of capital. Corporations have to pay more in interest for every factory they want to open. Small businesses are facing higher loan costs when they’re considering expansion. Washington itself is hurt by higher interest on the national debt, which last month hit $40 trillion for the first time ever. The United States has spent $931 billion on net interest so far this fiscal year alone, well ahead of the $804 billion spent on the national defense, according to Treasury.” Over the next decade, net interest on debt is projected to exceed $16 trillion, and analysts say that is a conservative estimate that could increase if rates continue to climb.
Last month, Treasury Secretary Scott Bessent attempted to slow the bleeding by announcing a surprising and controversial intervention. “His plan – promising to at least double Treasury buybacks – worked, but only for a few hours,” explains CNN. “The bond sell-off quickly resumed, with rates surpassing pre-intervention levels.” According to Fundstrat’s Singh, “It massively flopped. If anything, this may have made the problem worse. Bessent showed his hand. To investors, it was like, ‘Oh my gosh, he’s worried. We should be too.'”
JPMorgan’s Kelly told CNN that Bessent’s intervention failed because it did nothing to change the structural problem of sky-high deficits. “It’s just moving around a bunch of borrowed money. That’s not going to move the needle,” said Kelly. “Unless they can find a way to truly change the trajectory on our debt, the government is powerless to stop this. We’ve maxed out the credit cards.” According to Kelly, even if oil prices do come down, it may not be enough and may be too late to stave off total disaster. “The only foolproof way to get a major bond market rally is to have a massive recession,” he said. “That would do it.”