The Iran War’s Effect on Bonds

Esshan Kharat — April 7, 2026

On February 28, 2026, the United States and Israel launched a joint military campaign against Iran. President Trump assured the world that the war would only last “4 to 6 weeks.” It has now been 5, and the markets are reacting accordingly.

After the killing of Iran’s Supreme Leader Ayatollah Ali Khamenei, Iran has responded fiercely. Alongside numerous attacks on Israeli and U.S. bases in neighboring Middle Eastern countries, Iran has effectively closed the Strait of Hormuz. The Strait is a globally critical oil chokepoint, by which nearly 20% of global supply passes. The International Energy Agency (IEA) calls the closing of the Strait the “largest supply disruption in the history of the global oil market.”

For some simple statistics: before the war, Iran produced nearly 3.5 million barrels per day (mb/d) and 0.8 mb/d of crude and condensate oil daily, or approximately 4% of the global supply. Additionally, 20 mb/d passed through the Strait of Hormuz in 2025, with pre-war crude oil prices slightly under $70 per barrel, already slightly inflated due to regional uncertainty. However, since the beginning of the war, the price of crude oil has jumped to more than $110/ barrel, and Middle Eastern Production down 7 million barrels per day. Moreover, that price increase has translated to American wallets. Gas prices have surged by more than 30% to over $4 per gallon. On top of this, gas prices don’t exist in a vacuum. The higher cost of transporting goods leads to increased consumer prices, or, in other words, the dreaded inflation. Once inflation increases, it’s the Federal Reserve’s responsibility to handle it. As a result, the Federal Reserve has the ability to set rates that dramatically affect the $51 trillion U.S. bond market.

A bond is essentially a loan you can give to the government (the price) for a return (the yield) rate. However, if new bond prices go up, older bond prices go down. This conjures a simple law for bonds: when rates go up, prices go down. With every major borrower i n the United States relying on bonds, the way the Iran war could shake up the market could affect credit, investment, economic growth and more.

Conventional bond wisdom supports the idea that wars typically usher people to safety, which increases bond prices and lowers yields. However, the new Iran war has shattered this wisdom. The 10-year Treasury yield sat at 3.93% at the beginning of the war, and has increased to an 8-month high of 4.46% on March 27. 2-year and 30-year yields are also rising.

There are a couple of reasons as to why the increase occurred. Firstly, the oil shock increases expected inflation. It’s typically common to see a 0.3-0.4% increase in inflation for every sustained $10/b oil increase. In the long term, this will decrease purchasing power, and so to keep up with that inflation, bond yields have increased. Secondly, the Iranian war is not free of costs. The Pentagon has requested an extra $200 billion from Congress to keep the war alive. Furthermore, deficit spending has hit an all-time high. In fact, the U.S. government spent more than $1 trillion in just 5 months. This stimulates the economy’s demand side while simultaneously increasing inflationary pressure.

Looking beyond the U.S., there has also been a global bond sell-off. The bond market in Europe also faced similar spikes. Nations like Germany, France and Italy saw 10-year bond yields increase by 0.35%, 0.5%, and 0.6%, respectively, with Germany and France quickly nearing 15-year highs. Additionally, the U.K. is facing severe inflationary risks, with projections of nearly 5% in the coming months.

Currently, this issue is expected to be resolved soon. However, if the issue persists, multiple scenarios could occur. If oil surged to $170/b or even higher, the U.S. and the rest of the world could see inflation skyrocket. Furthermore, the United States needs to pay back nearly one-third of all bonds in circulation in the next year alone, mounting to nearly $10 trillion. Paired with the decrease in spending from the inflationary pressures, a prolonged war could slow economic growth in the long run.

Higher bond yields and interest rates have different implications for different groups of people. Those with heavy savings who are buying newer bonds are poised for financial gain; however, many others do not share this benefit. Housing prices are likely to increase as the war’s duration extends further and further. On top of this, the U.S. government will have to pay even more interest on its already $36 trillion in debt, already the 3rd largest expenditure in the budget. The final say of Iran and the bond market can only be fully told with time.

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Extemp Analysis by: Esshan Kharat

Question: “What will be the economic impact of the Iran war on the US?”

AGD: There are SO many funny quotes of Donald Trump and Iran. He once said Obama would start a war with Iran, he tweeted about “Allah” on Easter, etc… However, this is still a very serious conflict, and a narrative as an AGD or on top could both capture attention very well, and do justice to someone who can’t for themselves. It’s also important not to forget that real people are affected and dying in this war.

Background: I think a couple of things here are necessary to capture the question. Firstly, BRIEFLY contextualize our issue with Iran and how Trump started a war, and then come in with a bit of a background on the Strait of Hormuz and why it’s so critical. When there are long lines of reasoning or just a lot to explain, make sure not to do too much in the background. Stick to what’s necessary

Answer: I would say, given the article, that there will be long-term economic damage. The effect on the bond market and interest rates will slow down the economy. However, given that there’s lots of government spending, it is plausible to answer the other way around. There is no wrong answer, but in CX, it might be a bit easier to defend.

3 Points:

Interest rates decrease corporate investment
Inflation from higher oil prices
Increase in housing prices

Analysis + Concluding Thoughts

There are many ways to go with a question like this. Try to keep your answer very structured. In each point, explain the status quo/ the past of each scenario (corporate investment, inflation, housing), then explain how the Iran war will affect that. That could be through interest rates, inflation, and other factors. From there, just link that and impact, and you’ll have a complete point.