UBS Warns Iran Conflict Threatens US Debt
UBS is warning that the escalating conflict with Iran, combined with rising deficits and tariff threats, is creating fresh volatility for U.S. government debt. Investors are reportedly bracing for higher yields as military spending adds another layer of risk to the country's shaky fiscal outlook.
The escalating conflict with Iran is unfolding against a backdrop of a precarious U.S. fiscal situation, with the national debt already at its highest level in American history relative to the economy. The Congressional Budget Office (CBO) projects the federal budget deficit will reach $1.9 trillion in fiscal year 2026, with debt held by the public forecast to climb to 120% of GDP by 2036, a level that would surpass the record set just after World War II. Unbudgeted military expenditures for the conflict are set to place additional strain on this already stressed fiscal framework. While a precise official forecast is not yet available, initial estimates place the cost of the current U.S. military buildup around Iran at $25 to $40 million per day. This covers the operation of two carrier strike groups and heightened air assets, representing a surge of up to three times the baseline expenditure for routine Mideast operations. This new spending comes as the cost to service the existing national debt is soaring. Net interest payments are projected to hit $1 trillion in 2026 and are the fastest-growing category of federal spending. The average interest rate on federal debt had already more than doubled between 2020 and early 2026. Geopolitical shocks, like the Iran conflict, can lead to higher Treasury yields, further increasing the expense of financing the government's borrowing. The conflict also introduces volatility to the revenue side of the budget equation. Recent tariff policies were projected to reduce deficits by $3.0 trillion over a decade, but a Supreme Court ruling has thrown those projections into question. The CBO plans to recalculate its tariff revenue estimates, creating further uncertainty for the nation's fiscal outlook as it confronts a new, costly military engagement. The real financial danger lies in a prolonged conflict, which could erode the fiscal capacity of the United States. A sustained war risks not only adding trillions to the national debt but also potentially triggering a structural repricing of sovereign risk, where investors demand higher yields to hold U.S. debt. This could crowd out essential domestic investments and slow long-term economic growth. Disruptions to global trade, particularly the 20% of the world's seaborne oil that passes through the Strait of Hormuz, threaten to fuel inflation and further complicate the economic picture. A sustained spike in oil prices could reaccelerate inflation, potentially delaying any interest rate cuts and tightening financial conditions for American consumers and businesses already facing a fragile economy.
