A former IMF economist says he's worried that military spending will widen the US deficit and jack up borrowing costs

• US 10-year Treasury yields have surged as the Iran war prompts new inflationary fears.
• Desmond Lachman warns they could also be rising due to investor fear around rising US deficits.
• The US will have to ramp up military spending as the conflict with Iran continues, he said.

Yields on 10-year Treasury bonds are surging, and it might not simply be because the market is worried about the inflationary impacts of higher oil prices.

It's also due to fears that US government spending and debt levels will spiral further out of control as the US is forced to ramp up military spending amid its war with Iran, says Desmond Lachman, a senior fellow at the American Enterprise Institute, a conservative think tank.

It's a rekindling of concerns about inflation and debt levels that surfaced last year as President Donald Trump initiated new tax cuts and dramatically raised tariffs, sinking the value of the dollar.

"The United States went into this with a very bad budget situation, and what we're doing is we're just going to have to increase defense spending a lot, which is just going to make that situation worse. And that's putting pressure on the long-term interest rates," Lachman told Business Insider on Thursday. "You would have thought that the bond market would have gotten a safe haven bid, and we aren't seeing that. We're seeing the long-term rates go up."

Lachman, who is also a former deputy director of the International Monetary Fund's policy development and review department, said the conflict is likely to drag on for weeks. Iran remains committed to keeping the Strait of Hormuz closed to keep oil prices elevated, meaning the US military will need at least a few weeks to execute a plan to open and secure the passageway, he said.

Soon after the US and Israel struck Iran in late February, President Donald Trump said the US would ensure ships could pass through the Strait, but so far hasn't followed through. Iran struck multiple tankers on Thursday.

Energy Secretary Chris Wright told CNBC on Thursday that the US military didn't yet have the capability to protect ships passing through the Strait, but that "it'll happen relatively soon."

Lachman said such statements suggest the US is "at least a few weeks away" from opening up the Strait, and that oil prices would remain around or above $100 a barrel over that time.

The conflict with Iran is the latest threat to a rising US budget deficit, or the difference between what the government brings in via taxes and what it spends. Investors worry about the deficit and national debt for several reasons. One is that increased spending could drive the need for more borrowing, with rising US debt levels weighing on future fiscal spending as the government puts more money toward interest payments.

Another is that US debt could eventually reach a point where investors lose confidence that the US government will be able to repay them.

Last year saw similar panics about the deficit, with so-called bond vigilantes sounding the alarm as Congress debated the One Big Beautiful Bill Act. The spending bill, which included a program of massive tax cuts, was expected to add to the deficit by reducing government revenues from taxes.

In a March 9 client note, Lisa Shalett, the chief investment officer at Morgan Stanley Wealth Management, warned that investors are underappreciating the risks of rising debt levels associated with the war with Iran.

"While market resilience may be rational, we warn investors not to be complacent about the realities of this complex situation," Shalett wrote. "In fact, US Treasuries are already sounding some caution, with two- and 10-year yields up close to 20 basis points over the past week, suggesting possible risks of inflation, overheating growth and renewed pressure on debt and deficits, given the costs of a potentially prolonged conflict."