Since the Outbreak of the US-Iran War, Sovereign Debt Costs in Developed Countries Have Soared; G7 Has "Borne" $16 Billion

Global bond yields have continued to climb since the outbreak of the US-Iran war, resulting in a heavy fiscal cost for G7 countries, with the pressure still accumulating.

According to the Financial Times on August 30, analysis of government bond issuance data shows that since the outbreak of the US-Iran war in February this year, G7 countries have locked in approximately $16 billion in additional sovereign debt financing costs due to rising bond yields. If yields remain at current levels, this extra cost is expected to expand further to around $34 billion by the end of the first quarter next year.

The report indicates that the US has so far borne the highest additional cost, estimated at about $10.6 billion, which would increase by another $21.7 billion if yields remain elevated through the end of the first quarter of 2027. Meanwhile, major energy-importing countries such as the UK, Italy, Germany, and Japan are also affected—an energy supply crisis caused by the closure of the Strait of Hormuz has raised inflation expectations, driving up bond yields in these countries.

Jefferies Chief European Economist Mohit Kumar warns, "Rising interest rates are one of the biggest risks facing equity and credit markets." If the yield on the 10-year US Treasury surpasses 5%, the stock market will react negatively because higher bond yields reduce the relative attractiveness of stocks, and higher borrowing costs will also squeeze corporate profits.

The US Bears the Brunt, Upward Yield Pressure Remains Persistent

The Financial Times calculated these figures by comparing actual borrowing costs with pre-war interest rate levels; the $34 billion forecast was derived using national fiscal departments' issuance plans, combined with the issuance patterns across different maturities.

Thanks to the largest sovereign bond market in the world, the US is at the forefront in this round of yield increases.

In recent weeks, US bond yields have surged sharply, as investors grow increasingly concerned about the US's escalating public debt burden and the Trump administration's ability to contain the inflation spike fueled by the Iran war.

Notably, US Treasury Secretary Bessent attempted to reduce yields by increasing purchases of long-term bonds, but these efforts have had little effect, and the upward trend in yields has not reversed.

Currently, government bonds of virtually every maturity from all G7 countries are trading at interest rates higher than those in February, directly increasing the costs that governments must pay when issuing new debt. The remaining G7 countries combined have accounted for over a third of the additional incremental costs in this round.

The energy supply crisis triggered by the closure of the Strait of Hormuz is one of the important drivers of this round of yield increases. The UK, Italy, Germany, and Japan are all major energy importers. The rise in energy prices has directly boosted inflation expectations, which in turn has pushed up the sovereign debt financing costs for these countries.

Although the additional costs above are relatively limited compared to each country's overall public spending commitments, analysts point out that this will put extra pressure on already strained government balance sheets.

Multiple Factors Combine, Yields Could Trend Higher Longer Term

Economists warn that several structural factors are working together to push yields even higher.

Adam Posen, President of the Peterson Institute for International Economics, notes, "Aside from inflation risk, the political stability of the US, France, Japan, the UK, and even Germany faces real risks, adding geopolitics as another layer of genuine risk."

He further adds that increases in defense spending, rising demands from an aging population, expanded infrastructure investment, and growing green spending outside the US all exert upward pressure on real interest rates.

Additionally, massive investment in AI infrastructure could also crowd out assets like sovereign bonds, pushing yields even higher.

James Knightley, Chief International Economist at ING, notes that rising borrowing costs are "not just an issue of fiscal sustainability; in the US, it is already restraining economic activity through higher borrowing costs for households and businesses." He warns that the US housing market has stalled, and a steeper yield curve could cause mortgage rates to exceed 7%.

Era of Capital Scarcity, Heightened Competition for Sovereign Debt

Michel Martinez, Chief European Economist at Societe Generale, observes that this trend reflects 'a world where capital is no longer abundant is being repriced'. He points out that sovereign borrowing is increasingly competing with AI-driven investment booms, as well as structural spending needs such as defense, energy transition, and reindustrialization for savings capital.

Gianluca Salford, Head of European Rates Strategy at Morgan Stanley, believes the current trend is a return to a "normal world" before the low-growth, low-inflation, low-interest rate environment of the 2010s. He states:

"This is not an obviously unmanageable situation... Sometimes crises have to be endured, but countries typically take the right steps to stay on track, as there are fundamentally no other viable alternatives."

Mohit Kumar further points out that in a high interest rate environment, reducing fiscal deficits becomes "even more difficult," and with the US midterm elections and multiple European parliamentary elections approaching, governments remain motivated to implement expansionary fiscal policies, which will make debt management even more challenging.