Strategic Risk Intelligence Brief by Global Insight Group.
This analysis is based on the GFDD Framework™ developed by Michaela Schaaf-Hoffelner and is designed for executives, investors and strategic decision-makers.

Updated: September 03, 2026

While U.S. bombs fall on Iranian targets, Washington is fighting a second war at home: against its own bond market.

U.S. government debt has surpassed $40 trillion. Long-dated Treasury securities are losing value,, yields are rising, and some of America’s most reliable foreign creditors are beginning to look for alternatives. China has been reducing its Treasury holdings for years. Now Japan is increasingly withdrawing capital from foreign bonds and reallocating it to its domestic market.

At the same time, the Iran war is driving up oil prices, inflation and U.S. government spending. Treasury Secretary Scott Bessent is already responding by expanding buybacks of long-dated government bonds.

This raises a critical question: Could the war provide Washington with a political and monetary escape route from its debt trap despite its enormous cost? Or is it accelerating the very crisis it may be intended to contain?

Are U.S. Treasuries Already in Crisis?

The United States is not yet facing a conventional sovereign default crisis. It borrows in its own currency and and can meet its obligations in nominal terms. However, markets are demanding an increasingly high price to finance American debt.

The yield on the benchmark 10-year Treasury briefly climbed to to approximately 4.81% in early September, reaching its highest level since November 2023. Thirty-year yields exceeded 5.3% in August.

Rising yields mean falling bond prices. Every new round of borrowing therefore becomes more expensive for Washington. As existing debt matures and has to be refinanced, higher market rates progressively feed into the federal government’s interest bill.

The impact does not stop in Washington. U.S. Treasuries serve as the foundation for pricing across global financial markets. When Treasury yields rise, mortgages, corporate bonds and consumer credit become more expensive. Equity markets also come under pressure because investors can earn higher returns from supposedly risk-free government debt.

The crisis is therefore not that the United States can no longer find buyers. The problem is that investors are demanding higher yields just as Washington needs to refinance and issue unprecedented volumes of debt.

Foreign Governments Are Reducing Their U.S. Treasury Holdings

There is no global fire sale of U.S. government bonds yet. Total foreign Treasury holdings actually increased from approximately $9.09 trillion in June 2025 to $9.30 trillion in June 2026.

Below that headline figure, however, the buyer base is changing.

Holdings attributed to foreign official institutions, including central banks and sovereign entities, declined by approximately $114 billion over the same period. Additional demand came primarily from private investors and international financial centres.

This is not necessarily reassuring. Official institutions often hold U.S. Treasuries for strategic reasons as part of their foreign exchange reserves. Private investors have no comparable loyalty. They buy only when the yield, liquidity and currency risk are sufficiently attractive.

China has been reducing its officially reported Treasury holdings for years. At the end of 2013, it held approximately $1.27 trillion. By June 2026, that figure had fallen to just $633 billion. China reduced its holdings by another $98 billion within the most recent 12-month period.

Other countries have also cut their exposure:

• India reduced its holdings from $227 billion to $186 billion.
• Brazil reduced its holdings from $215 billion to $168 billion.
• Switzerland cut its holdings by approximately $16 billion.
• Japan held roughly $38 billion less than it had one year earlier.

The world is not abandoning U.S. Treasuries. But long-term sovereign buyers are increasingly being replaced by return-driven private capital, and that capital is demanding a higher price to continue financing Washington. Current U.S. Treasury TIC data

Why Japan Could Become the Turning Point

Japan is the most consequential new factor in this equation. With holdings exceeding $1.1 trillion, it remains the largest foreign holder of U.S. government debt.

For decades, Japanese banks, insurers and pension funds were effectively forced to look abroad for returns. Japanese government bonds offered almost no yield, making American, European and Australian debt natural destinations for Japan’s vast pool of savings.

That model is beginning to reverse.

The yield on 10-year Japanese government bonds has moved above 3% for the first time since 1996. At the same time, high currency-hedging costs are making U.S. bonds less attractive to Japanese investors.

Japanese investors sold a net ¥3 trillion in foreign bonds between the beginning of 2026 and August 22. This amount does not consist exclusively of U.S. Treasuries. Nevertheless, the data point to a structural repatriation of capital. A survey of 82 Japanese corporate pension funds also recorded the strongest intention to increase domestic bond holdings since the survey began in 2008. Reuters

Japan does not need to liquidate its U.S. holdings overnight to affect global markets. It is enough for the largest foreign holder of Treasuries to stop absorbing additional American debt as a matter of course.

The real risk is therefore not a dramatic one-day sell-off. It is a gradual buyers’ strike.

America’s Escape Routes Are Narrowing

For U.S. Treasury prices to recover sustainably and yields to fall, the United States would need a far more favourable combination of inflation, economic growth, debt reduction and investor demand.

None of these conditions is currently secure.

Lower Inflation

The Iran war is moving inflation in the wrong direction. Higher oil and gasoline prices raise the cost of transportation, manufacturing and consumption. The Federal Reserve can suppress demand, but it cannot produce additional oil or secure the Strait of Hormuz.

In July, the Fed kept its target rate at 3.50% to 3.75%. Three members of the Federal Open Market Committee already favoured a 25-basis-point increase. The Fed explicitly cited elevated inflation and energy-related supply shocks. Federal Reserve

Lower Government Debt

This route is also effectively blocked. U.S. government debt surpassed $40 trillion only 19 months after Donald Trump returned to the White House.

The costly Iran war, tax reductions, social spending and rising interest costs are weighing on the federal budget simultaneously. The spending cuts promised during the election campaign have come nowhere close to reversing the trend. Reuters

Strong, Non-Inflationary Growth

A strong economy helps only if growth is productivity-driven, increases tax revenue and reduces debt relative to economic output. Growth alone can increase inflation and intensify the competition for capital.

Federal Reserve Chair Kevin Warsh has already warned of a growing capital constraint. The U.S. government and the major technology companies require enormous amounts of financing at the same time. Both are competing for the same marginal investment dollar.

New Buyers

If traditional foreign buyers become less willing to expand their holdings, Washington has three options: offer higher yields, create new sources of regulatory demand or intervene directly in the market.

That intervention has already begun.

Bessent’s Treasury Buybacks: Stabilisation Tool or Hidden Warning Signal?

Treasury Secretary Scott Bessent has doubled the planned size of certain long-dated Treasury buyback operations from $2 billion to $4 billion per transaction. The programme is expected to increase buybacks by at least $14 billion during the current quarter, and Bessent has indicated that the volumes could be expanded again.

Officially, the buybacks are intended to improve liquidity in older Treasury securities. The timing is nevertheless difficult to ignore: the expansion was announced after the 30-year Treasury yield reached a 19-year high. Reuters

The buybacks do not mean that no one is willing to purchase U.S. government debt. They do show, however, that the Treasury considers stress at the long end of the market serious enough to justify active intervention.

The debt itself is not eliminated. The Treasury repurchases older, long-dated bonds using available liquidity or proceeds linked to other debt issuance. The liability does not disappear. It is effectively reshuffled across the government’s funding structure.

Bessent is therefore not solving America’s debt problem. He is attempting to contain its most visible and potentially destabilising consequence: long-term borrowing costs that are placing the government, housing market and corporate sector under pressure simultaneously.

More importantly, the initial calming effect has already faded. Treasury yields resumed their rise. The market’s message to Washington is clear: $4 billion per operation does not change the underlying fiscal and inflationary fundamentals.

War as an Escape Route or an Accelerant?

At first glance, war can support U.S. Treasuries. When global investors panic, they often seek dollar liquidity and supposedly safe U.S. government bonds. A decisive American victory over Iran could also restore Washington’s military credibility and reinforce the Gulf states’ security dependence on the United States.

That outcome could strengthen the dollar-based financial order. Energy exports would continue to be priced predominantly in dollars, oil revenues would flow back into Western financial markets, and alternative BRICS settlement systems would appear less urgent.

War can also provide Washington with a political explanation for inflation, higher gasoline prices and rising deficits. Measures that might otherwise look like a bailout of the Treasury market can be presented more easily as necessary financial stabilisation during a military emergency.

Yet the same war could become an accelerant for the U.S. debt trap.

Every additional month of conflict means higher military spending. Attacks around the Strait of Hormuz add a persistent risk premium to oil prices. Higher energy costs fuel inflation, prevent interest-rate cuts and push down the value of long-dated bonds. An attempt to defend the geopolitical dollar system through military power could therefore undermine its financial foundations.

Three distinct scenarios emerge.

Scenario 1: A Rapid U.S. Victory

Iran is forced into far-reaching military or economic concessions. Conditions around the Strait of Hormuz stabilise, oil prices fall and inflationary pressure begins to ease.

The Federal Reserve regains room to manoeuvre, Treasury yields decline and U.S. government bonds become more attractive. At the same time, a visible American success reinforces the credibility of U.S. security guarantees across the Gulf.

For Washington, this would be the preferred escape route. However, military success would not automatically create a durable post-war political order. Without a stable settlement, escalation could simply be postponed.

Scenario 2: A Permanent War of Attrition

This currently appears to be the most plausible scenario. Neither Iran nor the United States achieves a decisive breakthrough. Air strikes, ceasefires, sanctions, blockades and proxy conflicts alternate without resolving the underlying confrontation.

Oil retains a permanent geopolitical risk premium. Inflation and military expenditure remain elevated. The Fed has little room to ease, while Bessent comes under growing pressure to stabilise the Treasury market. Foreign sovereign investors continue to diversify.

At the same time, other actors can exploit America’s overstretch by intensifying additional conflict zones. U.S. military assets, capital and political attention become divided across a growing number of theatres. The war of attrition is therefore fought not only militarily, but financially.

This dynamic is examined further in Ukraine and Iran: Two Fronts, One War of Attrition Against the United States.

Scenario 3: An Uncontrolled Multi-Front Shock

The Iran war escalates, critical energy or transport infrastructure suffers major damage, and additional geopolitical flashpoints intensify at the same time.

A renewed oil shock would push the United States towards stagflation: high inflation combined with weakening growth. Treasury yields could rise further, equity and property markets would come under pressure, and foreign investors would demand an even larger risk premium.

If the Federal Reserve were then forced to provide liquidity or resume bond purchases despite elevated inflation, the decisive tipping point would have been reached. Monetary policy would no longer be focused primarily on price stability. It would be protecting the government’s ability to finance itself and preventing disorder in the Treasury market.

The Iran war is therefore not a reliable escape route from America’s debt trap. It may generate short-term safe-haven demand, reinforce the dollar system and provide political justification for market intervention. The longer it continues, however, the more it drives inflation, government spending and borrowing costs.

Washington is now fighting to preserve two foundations of American power at the same time: military dominance and financial credibility.

The decisive question is no longer simply whether the United States can win this war.

It is: Who is still willing to finance it?

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Author of Global Insight Group Intelligence:

Michaela Schaaf-Hoffelner has more than 35 years of experience in strategic and technical project and product management, particularly in IT, control systems and intralogistics. Through her long-standing work with complex systems, she identifies structural risks and dynamic misalignments at an early stage – risks that are often overlooked in conventional analysis.

Her focus is on making causal relationships and systemic dependencies visible and translating them into concrete strategic advantages for investors and decision-makers. Her analyses combine deep technical systems understanding with geopolitical and economic developments.

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GFDD Framework™ and GFDD Diagnostics™ are proprietary analytical concepts developed by Michaela Schaaf-Hoffelner. © 2026 Global Insight Group LLC. All rights reserved.