After the war between the United States and Iran, Government Bond yields rose, pushing the additional Government Bond funding expense that the Group of Seven (G7 — the United States, the United Kingdom, France, Germany, Italy, Canada and Japan) will have to bear to $16 billion (about 22 trillion won). With inflation pressures building amid energy supply fears from the closure of the Strait of Hormuz, analysts say governments' funding burdens are mounting as areas requiring large sums — including artificial intelligence (AI), the defense industry (defense) and infrastructure — expand.
On the 30th, the Financial Times (FT) analyzed G7 Government Bond issuance data and found that, since the U.S.-Iran war began on Feb. 2, rising Government Bond yields have added $16 billion (about 22 trillion won) in Government Bond funding expense for the G7 to date. When Government Bond yields rise, the interest expense the government must bear increases when it issues new Government Bonds or conducts refinancing on existing debt at maturity.
Nearly all maturities of Government Bonds issued by each G7 country are trading at higher yields than in February. Based on forward Government Bond issuance plans and maturity patterns released by national treasuries, the FT estimated that if current yields persist through the first quarter of next year, the G7's Government Bond funding expense will increase by an additional $34 billion (about 47 trillion won). Including expense already incurred, the additional funding expense since the U.S.-Iran war could reach about $50 billion (about 69 trillion won).
In this case, the United States, which has the world's largest Government Bond market, bears the biggest share of the additional expense. Since the war with Iran, the United States has incurred $10.6 billion (about 15 trillion won) in additional Government Bond funding expense, about two-thirds of the G7's total increase. If current yields continue through the end of the first quarter of next year, the United States is expected to bear an additional $21.7 billion (about 30 trillion won).
U.S. Government Bond yields rose as concerns over America's growing national debt coincided with doubts about whether policymakers can curb war-driven inflation. U.S. Treasury Secretary Scott Bessent is trying to lower long-term rates by increasing purchases of long-dated Government Bonds, but yields continue to rise.
The United Kingdom, Italy, Germany and Japan — G7 members highly dependent on energy imports — are also feeling the impact. This is the fallout from the energy supply crisis triggered by the closure of the Strait of Hormuz. As energy supplies are disrupted, concerns over inflation have grown, pushing up these countries' Government Bond yields.
The problem is that governments are already facing massive funding needs. Spending on defense, aging-related expenditure, infrastructure and the energy transition, and reindustrialization is rising, straining public finances. On top of that, the AI investment boom is intensifying global competition for capital. As big tech companies raise large sums to build AI infrastructure such as data centers, they are competing with Government Bonds and other investment destinations for investors' money.
Michèle Martinez, chief Europe economist at Société Générale, described the trend as "a repricing that reflects a world where capital is not as abundant as before." Martinez analyzed that governments' Government Bond issuance is competing for savings not only with the AI investment boom but also with structural expenditure needs such as defense, the energy transition and reindustrialization.
There are also warnings that if rates keep rising, the burden could grow not only for public finances but also for financial markets such as stocks and corporate bonds. Mohit Kumar, chief Europe economist at Jefferies, said, "Rising rates are among the biggest risks to equities and credit markets," forecasting that if the U.S. 10-year Government Bond yield tops 5%, the stock market will react negatively.
Households and corporations will also find it hard to avoid the impact of high rates. James Knightley, chief global economist at ING, said elevated borrowing expense is constraining U.S. household and corporate activity. He projected that with the U.S. housing market stagnant and the yield curve steepening, the mortgage loan lending rate could exceed 7%.
Experts say that even if inflation pressure from the U.S.-Iran war eases, it is uncertain whether Government Bond yields will return to the ultra-low levels of the past. That is because, in addition to political uncertainty and geopolitical risk in the United States, Europe and Japan, areas that need capital worldwide — including AI, defense and infrastructure — are expanding simultaneously.
Adam Posen, president of the Peterson Institute for International Economics (PIIE), analyzed that "defense expenditure, spending driven by demographics, infrastructure investment, and green investment outside the United States are all putting upward pressure on real interest rates."