This past week, auctions for two-, five- and seven-year Treasury notes all drew weak demand, forcing yields to go higher than expected. That’s a stark contrast from last month, when a Treasury offering saw the highest demand ever in the history of 30-year auctions.

The short end of the yield curve is under extra pressure as soaring oil prices boost the inflation outlook and put additional rate cuts from the Federal Reserve on hold, with odds of a rate hike also increasing.

Meanwhile, the cost of the U.S. war on Iran is worsening the debt picture amid reports the Pentagon is seeking $200 billion from Congress. Not only has the military depleted much of its most expensive munitions that must be replenished, Iranian attacks have damaged or destroyed U.S. aircraft, radar systems, and bases.

“The U.S. Treasury bond market has finally responded to the Mideast war, giving its assessment of the energy shock’s severity and the war’s effect on U.S. fiscal imbalance and inflation,” RSM Chief Economist Joseph Brusuelas said in a note on Wednesday, pointing to a notable increase in bond market volatility and a rising risk premium to buy Treasuries.

“Investors’ concerns include an unsustainable American fiscal position, rising inflation risk and a growing uncertainty about war,” he added, as the 2-year yield topped 4.0% this week, while the 10-year yield shot above 4.4%.

The MOVE index that tracks volatility in the Treasury market has spiked to levels consistent with price instability and policy dysfunction, Brusuelas noted.

If uncertainty continues, it could trigger broader funding stress in debt markets that were already under pressure from worries about private credit, he predicted.

The warning highlights the role of “bond vigilantes,” a term coined by Wall Street veteran Ed Yardeni in the 1980s, referring to traders who protested huge deficits by selling off bonds to push yields higher.

Previous selloffs have reined in presidents, including Trump, who pulled back on his trade war last year after the bond market turned “yippy.” With the U.S. now in an actual shooting war, bond vigilantes could throw their weight around again.

“The need for additional spending to finance the war would increase U.S. debt, sparking a bond market selloff as investors require additional compensation to cover potential losses,” Brusuelas said. “Long-term rates such as 30-year mortgage rates are based in part on the benchmark U.S. 10-year yield. Most important: The bond market remains undefeated.”

At the same time, the Iran war has now entered its fifth week, with some analysts predicting it could drag on into the fall or even next year.

That’s as the conflict widens to Iranian allies in Iraq and Yemen, while Persian Gulf neighbors edge closer to taking direct military action against the regime, which is targeting their economic infrastructure.

Thousands of U.S. Marines and paratroopers are also on their way to the Middle East, while the White House reportedly weighs deploying another 10,000 troops for a potential ground assault in Iran to reopen the Strait of Hormuz.

A prolonged war that boosts borrowing costs would come as the federal government must refinance $10 trillion of debt that is coming due in the next 12 months, while the budget deficit is already on pace to hit $2 trillion, according to Apollo Chief Economist Torsten Slok.

But the government also faces more competition for bond investors’ dollars. He previously warned the flood of corporate debt could make borrowing more expensive for the administration, and that’s exactly what happened earlier this month during the single busiest day on record for U.S. corporate bond sales.

“Total gross corporate bond issuance in 2026 is likely to be around $2 trillion because of increased supply from hyperscalers,” Slok said in a note on Tuesday. “Adding it all up, the total amount of investment grade supply coming to the market this year is around $14 trillion. The bottom line is that the growing supply of investment grade fixed income product is putting upward pressure on rates and credit spreads.”