UBS Warns of US Debt Risk from Iran Conflict
UBS is warning that the U.S. military action against Iran is worsening concerns about American government debt and deficit spending. The bank points to the combination of higher military spending and trade uncertainty as a key driver of market volatility.
The U.S. national debt stood at $38.43 trillion as of early January 2026, having increased by an average of $8.03 billion per day over the previous year. The Congressional Budget Office already projected a $1.9 trillion deficit for fiscal year 2026 before the full costs of the recent escalation were factored in. Even before the current conflict, U.S. military actions in the Middle East between October 2023 and September 2025 were estimated to cost up to $12.07 billion. These expenses covered the deployment of carrier strike groups and the use of advanced missile systems against Houthi militants. The current joint U.S.-Israeli military campaign, "Operation Epic Fury," began on Saturday, February 28, 2026. As of March 2, four U.S. service members have been killed in action. The operation follows the largest U.S. military buildup in the region since the 2003 invasion of Iraq. Analysts project that U.S. defense spending is on track to reach $1 trillion in 2026. The Trump administration has also proposed a broader $500 billion increase in military spending while encouraging allies to increase their own security investments. The escalation has had a direct market impact, with stocks for defense contractors like Lockheed Martin, Northrop Grumman, and RTX Corporation rallying on Monday. The iShares U.S. Aerospace & Defense ETF has gained 35% since the first U.S. strike on Iranian nuclear facilities in June of last year. Heightened geopolitical events can increase government borrowing costs and pose risks to financial stability. Research indicates that as geopolitical tensions rise, domestic entities tend to decrease their holdings of government debt, while foreign investors may adopt a more risk-taking approach.
