Bond investors bet the U.S. can’t grow its way out of debt

Long-term U.S. Treasury yields are rising as investors bet the government can’t grow its way out of mounting debt. Short-term yields remain anchored by expectations the Federal Reserve will eventually cut rates, but the long end of the curve is under pressure from inflation, elevated oil prices, and a surge in deficit spending. The spread between five-year and 30-year Treasury yields was 96.9 basis points on Monday — down from 114 before the war but up from a conflict-driven low of 82. That movement reflects a growing trade: investors are buying short-dated debt while selling long-dated bonds, a strategy known as a curve steepener. They’re not betting on war escalation. They’re betting on its fiscal aftermath. The Pentagon is seeking over $200 billion in supplemental funding for the Iran war, on top of a $900 billion defense bill already signed for fiscal year 2026. That spending will require more Treasury issuance, and investors demand higher yields to hold that debt. Oil prices are expected to average $96 a barrel this year, sustaining inflation and weakening demand. That dynamic hurts growth and the labor market — conditions that point toward eventual rate cuts. But those cuts are no longer priced in. Rate futures now reflect just 6 basis points of easing in 2026, down from 55 before the war. The trade isn’t about volatility. It’s about arithmetic. The back end of the curve bears the cost of war finance.