“That’s partly what’s weighing on people’s minds — the financing of the war, the lower growth in general,” said Ruben Hovhannisyan, Generalist Portfolio Manager in TCW’s fixed income group.

The US budget deficit has narrowed in recent months, though it still totaled around $1 trillion in the five months through February. But investors are already factoring in the impact of a Supreme Court ruling that struck down US trade tariffs, which had brought in tens of billions of dollars in government revenue.

“It’s coming at a time when the tariffs are going the other way for Trump and that’s inflationary, and wars are inflationary,” said Matt Eagan, a portfolio manager at Loomis, Sayles & Co., which oversees more than $430 billion in assets.  “This is just adding to the deficit.”

Higher Debt

Around the world, governments spent heavily during the 2022 energy crisis triggered by Russia’s invasion of Ukraine.

“With more limited fiscal headroom, higher debt loads and higher interest costs, the bond market may be less willing to fund such fiscal largesse this time round, or at least demand a higher real yield to provide that money,” said Chris Arcari, head of capital markets at Hymans Robertson.

Officials in Europe are also confronting the prospect of higher defense spending and potential energy subsidies if oil prices remain elevated. On Wednesday, European Commission President Ursula von der Leyen floated various measures including a cap on the price of gas.

European governments will be quick to intervene in an energy shock, following their 2022 ‘playbook’, when crisis spending was funded by joint EU issuance, according to Nomura senior European economist Andrzej Szczepaniak.

“You can definitely imagine that scenario: joint EU issuance and therefore structural support across the EU area,” he said in an interview with Bloomberg TV.

It’s a similar story in Asia.

Countries from Australia to Singapore have increased their spending on defense, while Japan is eyeing record spending on such outlays this year. The Iran conflict risks increasing pressure on government to ratchet it up even more over the long term, further complicating efforts to consolidate fiscal positions, according to Carol Kong, strategist at Commonwealth Bank of Australia.

“The rise in inflation expectations will also pressure bond yields higher and in Asia this includes Japan,” she said.

Even in China, where markets have been a relative haven, longer-dated bonds have come under some pressure with 30-year yields at the highest since 2024, thanks to fears about inflation.

And a wave of government borrowing globally could put further pressure on the $31 trillion US Treasury market, should investors opt for higher yields elsewhere.

If the conflict drags on and governments respond with higher spending, investors say they will continue to demand higher risk premium for longer-dated securities.

“The supply of Treasuries is going to go higher at a time when the US needs to get buyers,” Loomis Sayles & Co.’s Eagan said. “I don’t see any interest in the 30 year until it’s north of 5%.”

--With assistance from Will Standring.

Most Read from Bloomberg Businessweek

• China’s Gen Z Day Traders Trust in Chatbots and Move Markets

• The 12 Days That Changed the Course of War in Iran

• How a Die-Hard Libertarian Is Negotiating Lower Health-Care Costs

• This Maker of $4 Million Sports Cars Is Weighing an IPO