The Pentagon Inspector General published its first cost assessment of the Iran conflict on Tuesday morning. Through June, the war consumed $33.4 billion: $22.3 billion in expended munitions, $3.7 billion in equipment losses, and $7.4 billion in other expenditures. Iranian strikes damaged or destroyed hundreds of buildings and structures at American bases in Kuwait, Bahrain, Qatar, the UAE, Saudi Arabia, Iraq, Oman, and Jordan. Dozens of aircraft were destroyed or damaged, including four F-15E Strike Eagles, one A-10, and more than thirty drones. Fourteen members of the U.S. armed forces lost their lives. The report noted strategic inventory shortfalls and industrial base bottlenecks for munitions resupply. The cost of repairing damaged facilities was not included.
The report landed on the same morning that the 10-year Treasury yield reached its highest level since July 2007. By early Tuesday it hit 5.03 percent. The 30-year yield rose to 5.39 percent. The 2-year touched a 52-week high at 4.65 percent. Global borrowing costs rose in Japan, Germany, the United Kingdom, France, and elsewhere. The Federal Reserve began its two-day September meeting, and the CME FedWatch tool showed a 93 percent probability that the committee would raise the federal funds rate by a quarter point on Wednesday, to a target range of 3.75 to 4.00 percent. It would be the first hike since July 2023.
The Chain
The causal chain runs from base damage in Kuwait to borrowing costs in Kansas. The war keeps Brent crude above $107. Oil above $107 keeps inflation above 2 percent for the fifth consecutive year. Five years above target forces the Fed to consider tightening that every analyst on Wall Street now expects. And tightening pushes the yield on the benchmark 10-year note past the 5 percent threshold that Barclays calls a historically important inflection point, beyond which rates have typically become a more persistent headwind for equities.
S&P 500 futures fell 0.59 percent Tuesday morning. The index lost 0.48 percent Monday. The Stoxx 600 dropped 0.84 percent in early European trading. The FTSE 100 fell 0.68 percent. South Korea's KOSPI lost 0.85 percent. China's CSI 300 declined 0.67 percent. The Philadelphia Semiconductor Index tumbled 5.9 percent on Monday, with Nvidia down 3.4 percent and Intel off 5.6 percent. Brent crude traded at $107 after touching $109 the previous day.
The Debate
Goldman Sachs chief U.S. economist David Mericle argues that raising rates would be a mistake. In a note this week he wrote that all of the overshoot above the 2 percent target can be attributed to one-time factors whose impact is likely to fade, and that core PCE inflation from June through August has improved to an annualized pace of around 2.5 percent. The bank's official forecast is that a hike will happen anyway.
A Duke University survey of 32 former Federal Reserve governors, regional bank presidents, and staff found that 29 recommended a rate increase. One said hold. Two did not answer. One respondent wrote that the upside risks to the inflation outlook have worsened since July: energy prices have not reversed as expected, tariff pass-through continues, and the AI buildout is adding to price pressures. Another said the Fed's credibility is on the line.
The division maps onto a question Milton Friedman settled in 1963 and the war in Iran has reopened: Is inflation really inflation when it comes from supply shocks rather than money printing? Mericle says no. The futures market, pricing 93 percent, says it does not care. The distinction between monetary inflation and relative price adjustment is the kind of thing that matters profoundly in a textbook and not at all when your mortgage resets.
The Ricochet
Wells Fargo's Paul Christopher offered a counterpoint to the narrative that rising yields signal a crisis of confidence in American debt. The September 9 auction of 10-year Treasury notes drew a bid-to-cover ratio of 2.71, the strongest since 2019. Investors are not fleeing Treasuries. They are buying them at prices that reflect a world where oil costs $107, the Fed is about to hike, and the Pentagon just disclosed that the first four months of a Middle Eastern war burned through $22 billion in munitions alone.
BMO Wealth Management's Carol Schleif said the Fed has little choice but to hike because the bond market has been signaling for weeks that higher rates are warranted. She added that rising borrowing costs are unlikely to slow corporate America's AI, infrastructure, and reshoring spending, because companies borrowing to invest in AI can handle the uptick relative to their strong double-digit margins.
BlackRock's Investment Institute maintained its overweight on U.S. equities and AI, noting that higher rates and strong equities need not be contradictory when yields reflect stronger investment and growth.
But the yields do not reflect stronger investment and growth. They reflect a war that has cost $33.4 billion and counting, oil that has not traded below $100 since Saudi Arabia's East-West pipeline was hit, and an inflation rate that has not started with a one since 2021. The ricochet from the battlefield to the bond market passes through every asset class on the way. The Pentagon's $33.4 billion is the line item. The repricing of the yield curve is the invoice.