“Mortgage Rates at a Three-Year High, Treasury Yields at a 24-Year Peak”: Iran War Sends U.S. Borrowing Costs Soaring, With an End to Hostilities and Restored Energy Supplies Key to Stabilizing Rates

U.S. mortgage rates and Treasury yields surge amid fiscal deficits and fallout from the Iran war
Higher rates increase government interest expenses, intensifying the need for additional borrowing
Fed leans toward another hike this year as it guards against a broader inflation shock

U.S. mortgage rates have climbed to their highest level in three years, while the 10-year Treasury yield has reached a new high not seen since 2002. Continued Treasury issuance to finance substantial fiscal deficits, compounded by mounting military costs and persistently high oil prices as the Iran war drags on, is intensifying upward pressure on rates. Higher rates, in turn, are increasing government interest expenses, amplifying the need for additional borrowing to finance the deficit. Although President Donald Trump is pressing for rate cuts, the Federal Reserve (Fed) appears inclined toward another increase before year-end as it guards against the risk of an energy-driven inflation shock spreading more broadly.

U.S. Mortgage Rates at a Three-Year High

According to Reuters on October 7, with all dates hereafter in local time, the Mortgage Bankers Association (MBA) reported that the average U.S. 30-year fixed mortgage rate jumped 19 basis points (bp; 1 bp equals 0.01 percentage points) from the previous week to 7.49% in the week ended October 2. That was the highest reading since November 2023. After easing for a time following their sharp rise in 2023, U.S. mortgage rates are climbing more rapidly again this year. The 30-year fixed rate hovered in the 3% range in 2021, exceeded 7% in October 2022 and surged to 7.90% in October 2023. It subsequently retreated from that peak, reaching 6.13% in the week ended September 20, 2024. Following further fluctuations in 2025, it declined to 6.34% as of September 19, returning to the low-to-mid-6% range. With the rate rising to 7.49% early this month, the gap with the October 2023 peak has narrowed to 0.41 percentage points.

Both the duration of the recent rise and the size of the weekly increases stand out. Mortgage rates rose for seven consecutive weeks through the week ended October 2, pushing borrowing costs progressively higher over several weeks. The rate climbed from 7.12% as of September 18 to 7.30% on September 25 and 7.49% on October 2. As the weekly increase widened from 18 bp to 19 bp, the cumulative rise over those two weeks alone reached 0.37 percentage points. More than a quarter of the roughly 1.4-percentage-point increase since late February was therefore concentrated in that two-week period. The pace accelerated sufficiently for the rate to approach 7.5% just two weeks after entering the 7% range in mid-September.

U.S. Treasury Yields Set New Highs as Gains Accelerate Above 5%

The yield on the 10-year U.S. Treasury note, which serves as a benchmark for U.S. mortgage rates, also climbed to an intraday high of 5.364% on October 7, its highest level since 2002. That was approximately 0.34 percentage points above the previous peak of 5.02% reached during trading in October 2023. After surging in the autumn of 2023, the 10-year yield reversed course and declined to around 3.6% by mid-September 2024. It subsequently rose again, reaching approximately 4.8% in January 2025 amid substantial fluctuations. More recently, it has climbed toward the mid-5% range, successively surpassing the highs established over the past several years.

The pace of the increase accelerated further last month. After breaching 5% on September 14, the 10-year yield climbed to 5.293% on September 29, an increase of approximately 0.3 percentage points in about two weeks. The sustained rise produced the largest third-quarter increase since 1994. Gains continued into this month, with the yield reaching 5.3445% during trading on October 1 before setting a higher peak of 5.364% on October 7. In afternoon trading on October 7, however, it retreated to 5.284%, approximately 8 bp below its intraday high. With yields now hovering around 5.3%, relatively pronounced fluctuations are also occurring within individual trading sessions.

Table 1. Trends in U.S. Mortgage Rates and 10-Year Treasury Yields

Widening U.S. Fiscal Deficits Add to Treasury Supply Pressures

Market concerns over U.S. fiscal deficits and rising war costs are contributing to Treasury yields fluctuating at elevated levels. Mortgage rates are determined by adding compensation for prepayment risk and loan origination and servicing costs, among other factors, to Treasury yields. When Treasury yields rise, the underlying benchmark component of mortgage rates increases first. In the Treasury market, bond issuance to finance substantial fiscal deficits and inflation concerns have recently increased the compensation investors demand for holding long-term debt. With the prolonged Iran war adding military expenditure and inflationary pressures, markets appear to be subjecting the U.S. government's funding outlook to greater scrutiny.

The United States has already accumulated debt rapidly under a fiscal structure in which revenues struggle to cover expenditure. According to Treasury Department figures, total federal debt stood at $40.047 trillion on August 18, more than double the $19.95 trillion recorded in January 2017. Of that total, debt held by the public, which excludes holdings in intragovernmental accounts, amounted to $32.266 trillion. Borrowing surged during the COVID-19 response, followed by increases in Social Security and healthcare spending and interest costs, while tax cuts constrained the revenue base. In August, the Congressional Budget Office (CBO) raised its fiscal 2026 deficit forecast from $1.9 trillion to $2.1 trillion. A $200 billion reduction in projected annual revenue, driven by tariff receipts falling short of initial expectations, was cited as the principal reason for the revision.

Iran War Costs Add to U.S. Fiscal Strains

As the costs of the Iran war compound accumulated fiscal deficits, uncertainty over future expenditure has also increased. In an analysis released last month, the CBO estimated that the Defense Department had incurred $38 billion in costs from the conflict with Iran through August 1. That figure included replenishing expended munitions and replacing lost equipment, additional flight hours, operational expenses and higher fuel costs. The CBO also estimated that maintaining combat intensity at May–June levels would require an additional $2 billion a month, rising to $3 billion if it returned to July levels. Because budget requirements continue to vary with the duration and intensity of the fighting, war spending makes it harder for Treasury investors to gauge the volume of debt that will enter the market.

Additional borrowing to finance the war, combined with the refinancing of existing debt, also increases the government's interest burden. Newly issued Treasuries carry higher rates, while maturing low-rate securities are replaced with higher-rate debt, increasing interest expenditure. According to CBO estimates, net interest outlays totaled $963 billion during the first 10 months of fiscal 2026, from October last year through July this year, an increase of $117 billion, or 14%, from the same period a year earlier. Rising interest costs on existing debt are also increasing the need for additional borrowing to finance the fiscal deficit. In August, the Treasury projected privately held net marketable borrowing of $739 billion for the third quarter and $628 billion for the fourth quarter. Those figures are net of maturing debt repayments; the total issuance the market must absorb also includes securities issued to refinance existing obligations.

Most Fed Officials Favor Another Rate Hike by Year-End

As borrowing costs rise for both the government and the private sector, President Trump has renewed pressure on the Fed to cut rates. Yet with energy prices elevated by the Iran war pushing long-term yields higher, a decline in mortgage rates remains difficult to anticipate. The Fed is also leaning toward further tightening as it guards against the risk of high oil prices feeding into broader inflation. According to the minutes of the September Federal Open Market Committee (FOMC) meeting released on October 7, most participants considered another increase in the policy rate appropriate before year-end. That left room for further tightening after the September 15–16 meeting, when officials raised the rate by 0.25 percentage points to a range of 3.75–4.00%. Some participants also judged that the current rate level had only a limited restraining effect on demand.

The Fed's principal concern is that rising energy prices will increase business costs and feed through to goods and services prices, prolonging elevated inflation. In the minutes, many participants noted that the longer energy prices remained high, the greater the risk that cost increases in specific sectors would spread into broader inflationary pressures. Higher energy prices, they explained, were driving up transportation and raw material costs, increasing production and distribution expenses across multiple industries. Participants also reported signs that businesses were passing those additional costs on to consumers. If oil-driven increases in transportation and raw material costs are reflected in selling prices, an inflation shock originating in the energy sector could spread to other categories. Expanding investment in artificial intelligence (AI) and resilient consumer spending added to concerns that continued demand support could delay the return to price stability. Some participants also warned that inflation remaining above the 2% target for an extended period could influence wage negotiations and corporate pricing decisions.