When assessing the United States’ ability to continue its war with Iran, attention is usually focused on the number of warships, aircraft, missiles, oil reserves, and weapons-production capacity. But a less visible and perhaps more decisive battlefield is the US Treasury market.
If the war becomes prolonged, Washington will need more than weapons and ammunition. It will also need a deep, liquid, and stable market to finance the government’s rising costs. The problem is that signs from the US debt market are no longer particularly calm.
The yield on 30-year US Treasuries rose above 5.3% in August, a level last seen in 2007. At the same time, the war with Iran could raise the US government’s borrowing costs through higher energy prices, inflationary pressures, and rising expectations for interest rates.
This creates a dangerous feedback loop: a prolonged war means higher costs; higher costs mean larger deficits and more debt; more debt means greater Treasury issuance; and if investors demand higher yields to purchase that debt, the cost of the war and the overall cost of running the government also increase.
Dalio’s Warning: The Issue Is Not Just Interest Rates
Ray Dalio recently made a highly significant observation about the bond market that highlights precisely this point.
The veteran investor recently advised investors to reduce the weight of government bonds, allocate around 10% to 15% of their portfolios to gold, and also hold some Bitcoin. Dalio warned that the US debt crisis could reach a serious point within roughly the next three years.
His reasoning is clear: If demand for US debt declines, the government must either pay higher interest rates or move toward creating money and purchasing debt to prevent rates from rising further. Both paths could have consequences for inflation, the value of the dollar, and the stability of financial markets.
Dalio’s recommendation, of course, does not mean that a “bond-market collapse” is necessarily imminent. But when one of the world’s best-known investors, at a time when long-term Treasury yields are at multi-decade levels, speaks of gold and even Bitcoin as hedges instead of increasing exposure to bonds, his comments cannot simply be ignored.
Japan: The Link Between the Currency Market and US Treasuries
The story of the Japanese yen completes the picture.
Japan has spent around $96.5 billion in less than a month to support the yen, an unprecedented intervention carried out in coordination with Washington. Despite the move, the yen has once again approached the 160 level against the dollar, meaning that a significant portion of the intervention’s initial effect has been neutralized in a short period.
This is not merely a currency issue. Japan is one of the largest holders of US Treasury securities, and any pressure to finance foreign-exchange interventions could affect the country’s behavior in dollar-denominated assets.
For this reason, Washington cannot remain indifferent to developments involving the yen. US Treasury Secretary Scott Bessent had warned that disorderly conditions in the yen market could force the unwinding of so-called carry trades, destabilize global markets, and ultimately increase US borrowing costs.
The logic of this chain is important: Japan turns to its foreign-exchange reserves to defend the yen; if the pressure continues, the country’s behavior toward dollar-denominated assets could change; and any increase in selling pressure on Treasuries, at a time when the US government is facing heavy debt issuance, could push Treasury yields higher.
Of course, this trend should not be taken to mean directly that the Federal Reserve would be forced to purchase the same amount of assets or, in effect, “print money.” The relationship between Japan’s foreign-exchange intervention, bond sales, and the Federal Reserve’s response is considerably more complex.
But the direction of the pressure matters: If one of the largest foreign holders of US debt is simultaneously forced to use its dollar reserves to defend its national currency, this is happening precisely when the US Treasury market is facing heavy debt, budget deficits, and rising interest costs.
Washington on Several Fronts at Once
As a result, the United States is facing a multilayered problem. On one hand, it must spend to continue the war with Iran. On the other, it must contain the impact of higher energy prices and disruptions in the Strait of Hormuz on inflation. At the same time, it must keep the bond market calm. Ultimately, it must ensure that domestic and foreign investors remain willing to absorb US debt.
This is where the meaning of “US resilience” changes.
Resilience is not simply a question of how many aircraft, missiles, or warships the US military has or how long it can sustain military operations. The more important question is how many months or years the US economy can bear the cost of such a war without creating unbearable pressure on the debt market.
If Treasury yields remain high, the government’s interest costs will rise. If the stock market also comes under pressure, private-sector wealth and investment will suffer. If oil prices remain high and inflation rises again, the Federal Reserve will face greater constraints in cutting interest rates.
At the same time, if foreign investors gradually become less inclined to accumulate dollar-denominated assets, financing the US deficit will become more difficult and more expensive.
Under these conditions, the Iran war is no longer merely a geopolitical or military issue. It becomes a test of America’s financial capacity.
The United States needs warships, aircraft, and missiles to wage war. But to continue the war, it also needs buyers for Treasury securities.
Perhaps the most important question about the future of the war, therefore, is not simply how much firepower Washington possesses, but how long US financial markets will remain willing to finance the cost of that firepower.
If US military capabilities remain high but the cost of financing them reaches a point at which the debt market can no longer absorb the borrowing easily, the gap between the ability to wage war and the ability to pay for it will become apparent.
At that point, Japan, the yen, and the bond market will no longer be three separate stories. They will instead become components of a single issue: America’s financial resilience in a war whose costs are being paid not only on the battlefield.
NOURNEWS