The U.S.-Iran war has added $16 billion to the borrowing costs of the Group of Seven nations since Feb. 2, as rising government bond yields collide with surging demand for capital from AI infrastructure, defense, and other large-scale spending programs.
The Financial Times analyzed G7 government bond issuance data and found that higher yields have increased funding expenses across all seven member countries. When yields rise, governments pay more interest when issuing new bonds or refinancing existing debt at maturity.
If current yield levels persist through the first quarter of next year, the G7's additional funding burden could reach $50 billion, according to FT estimates based on treasury issuance plans and maturity schedules.
The U.S. carries the heaviest load
The United States, which has the world's largest government bond market, has incurred $10.6 billion in additional funding costs since the war began - roughly two-thirds of the G7's total increase. If yields hold through the first quarter, the U.S. is expected to bear another $21.7 billion.
U.S. Treasury yields have risen as concerns over the national debt combine with doubts about policymakers' ability to control war-driven inflation. Treasury Secretary Scott Bessent has tried to lower long-term rates by increasing purchases of long-dated bonds, but yields continue to climb.
The United Kingdom, Italy, Germany, and Japan - G7 members heavily dependent on energy imports - are also feeling the strain. The closure of the Strait of Hormuz has disrupted energy supplies, stoking inflation concerns and pushing up their bond yields.
Competition for capital intensifies
Governments already face massive funding needs. Defense spending, aging-related costs, infrastructure, the energy transition, and reindustrialization are all straining public finances. The AI investment boom adds another layer: big tech companies are raising large sums to build data centers and other AI infrastructure, competing directly with government bonds 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." She said government bond issuance is competing for savings not only with the AI investment boom but also with structural spending needs such as defense, the energy transition, and reindustrialization.
Rising rates pose risks beyond public finances. Mohit Kumar, chief Europe economist at Jefferies, said, "Rising rates are among the biggest risks to equities and credit markets." He forecast that if the U.S. 10-year Treasury yield tops 5%, the stock market will react negatively.
Households and corporations face higher borrowing costs too. James Knightley, chief global economist at ING, said elevated borrowing costs are constraining U.S. household and corporate activity. With the housing market stagnant and the yield curve steepening, he projected mortgage rates could exceed 7%.
Even if inflation pressure from the war eases, experts say bond yields may not return to the ultra-low levels of the past. Political uncertainty in the U.S., Europe, and Japan, combined with simultaneous global demand for capital across AI, defense, and infrastructure, points to persistently higher rates.
Adam Posen, president of the Peterson Institute for International Economics, said "defense expenditure, spending driven by demographics, infrastructure, and green investment outside the United States are all putting upward pressure on real interest rates."
Why this matters for government professionals
For those working in government finance, treasury, or budget roles, the takeaway is direct: the cost of borrowing is no longer a background variable. Every new bond issuance, refinancing decision, and infrastructure project now carries a higher price tag, and the competition for capital from AI and defense spending is not temporary. Professionals tracking fiscal planning should factor persistent yield pressure into their projections, not treat it as a short-term war shock. Understanding how AI investment flows affect capital markets can help government teams anticipate funding conditions - AI for Government courses offer a practical starting point, while AI for Finance training covers the analytical tools used to model these shifts.
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