Iran War Spending Rattles US Debt Market

The current conflict adds to a national debt that has swelled to over $38.7 trillion. This figure has nearly doubled since 2017, growing by roughly $77,000 per second over the past year. The federal budget deficit for the current fiscal year is projected to be $1.9 trillion. Historically, the U.S. has financed wars through a combination of debt, increased taxes, and inflation. While World War II saw a mix of debt and tax hikes, and the Korean War was funded almost entirely by higher taxes, the wars in Iraq and Afghanistan were financed primarily through debt as taxes decreased. This approach has led to historically high levels of debt. The Federal Reserve is navigating this complex fiscal landscape with a cautious monetary policy. In January 2026, the Fed held its policy interest rate steady at a range of 3.50%-3.75% after a series of rate cuts in late 2025. The central bank is balancing efforts to control inflation with a softening labor market, with markets anticipating potential rate cuts later in 2026. This new military spending comes at a time when U.S. defense expenditures were already on the rise. In 2024, military spending reached $968.38 billion. The conflict has spurred a rally in defense stocks, with the iShares U.S. Aerospace & Defense ETF gaining 14% year-to-date. Individual defense contractors like Lockheed Martin and Northrop Grumman have seen their stock prices surge since June of last year. The increased borrowing to fund the conflict could have significant consequences for the U.S. Treasury market. A UBS strategist warned in late 2025 that the rapid growth of U.S. government debt could erode the traditional "risk-free" status of Treasuries. The bank projected that the U.S. will issue as much debt in the next ten years as it did in the previous 235, a "huge supply" that could impact markets. The conflict could also lead to a depletion of U.S. munitions stockpiles. A 2023 report from the Center for Strategic and International Studies warned that a major conflict could exhaust certain munitions in as little as a week. In 2025, the U.S. military reportedly used a quarter of its entire THAAD missile stockpile in just a few days of operations against Iran. This situation presents a significant challenge for the U.S. economy. The national debt is already higher as a share of the economy than at any time since World War II and is projected to surpass the all-time record of 106% of GDP within three years. The added strain of war spending could further exacerbate this trend.