UBS: Iran War Adds Wobble to US Debt

The U.S. national debt has climbed to over $38.7 trillion, a figure that has nearly doubled since 2017. This growing liability is paired with a significant annual budget shortfall; the federal government spent $1.78 trillion more than it collected in fiscal year 2025. Projections for the current fiscal year anticipate another deficit of around $1.9 trillion. A substantial portion of this debt is held by foreign nations, totaling about $9.4 trillion as of late 2025. Japan is the largest foreign creditor, holding approximately $1.2 trillion in U.S. Treasuries, followed by the United Kingdom with holdings of around $888.5 billion. This international ownership makes the U.S. debt market susceptible to global economic shifts and geopolitical tensions. Current military operations in the Middle East already represent a significant daily expense. The cost of maintaining a heightened military presence near Iran is estimated to be between $25 million and $40 million per day. For perspective, a previous 37-hour U.S. military campaign targeting Iran's nuclear program cost an estimated $2.25 billion. An escalated conflict would introduce substantial new costs on top of the existing budget deficit. Beyond direct military expenditures, analysts warn of severe economic consequences. A prolonged conflict could push Brent crude oil prices to a sustained $150-$180 per barrel, with potential spikes over $200. Such a surge in energy prices would fuel inflation, creating a complex scenario for U.S. government bonds. While geopolitical turmoil often prompts a "flight to safety" to U.S. Treasuries, the threat of rising inflation could have the opposite effect, potentially driving a sell-off. Some financial models predict that a war with Iran, combined with existing debt fragility, could lead to a structural repricing of government debt. This could result in the 10-Year Treasury yield, a key benchmark for borrowing costs across the economy, rising to a range of 6.00% to 6.50%.