Prolonged conflict pushes up energy prices, inflation risks and government borrowing costs, while rising bond yields threaten to further squeeze consumers, businesses and financial markets.

The prolonged US war with Iran is driving up energy prices, fuelling inflation concerns and increasing government borrowing costs, putting fresh pressure on the US bond market and raising fears of a broader slowdown in the global economy.

The benchmark 10-year US Treasury yield climbed on Wednesday to its highest level in nearly three years as investors reassessed the economic impact of the conflict, which has now lasted more than six months.

Higher Treasury yields increase borrowing costs for the US government, businesses and consumers, including those seeking mortgages.

The conflict has also triggered an energy shock, with rising prices for oil, gasoline, diesel and jet fuel adding to inflationary pressures.

US diesel prices have risen by 51 per cent since the war began, while August was the most expensive month for US gasoline prices on record, according to the American Automobile Association (AAA).

Analysts warn that a prolonged conflict could push inflation and bond yields even higher, potentially forcing the US Federal Reserve to keep interest rates elevated or consider further increases.

The pressure is extending beyond the United States, with government bond yields rising across several major economies.

Germany’s 10-year government bond yield recently reached its highest level since 2011, while Britain’s 30-year yield climbed to its highest level since 1998. Japan’s 10-year yield also surpassed 3 per cent for the first time since 1996.

Higher bond yields can weigh on stock markets by making government debt more attractive to investors compared with riskier assets such as equities.

Rising US Debt Adds to Pressure

The war is also increasing US government spending at a time when the country is already carrying record levels of debt.

The US national debt reached $40 trillion last month, while the Treasury has spent about $931 billion on net interest payments this fiscal year, exceeding the $804 billion spent on national defence.

The growing demand for borrowing is occurring alongside a surge in corporate investment, particularly in the technology sector.

Technology companies are increasingly raising money through bond markets to finance the global expansion of artificial intelligence infrastructure, adding to competition for available capital.

Economists warn that the combination of prolonged conflict, higher energy prices, persistent inflation and large government deficits could create a damaging cycle in which rising borrowing costs weaken economic growth and further unsettle financial markets.

Although US Treasury Secretary Scott Bessent has sought to reassure investors through increased Treasury buybacks, analysts say lasting stability will ultimately depend on credible measures to address the country's growing debt and deficit burden.