Wars are expensive. Governments finance them through some combination of taxes, borrowing, and money creation. The bond markets are central to the financing. Understanding the dynamics affects both the bonds investors hold and the broader rate environment.
This page covers the patterns.
The term "war bonds" refers to government debt issued specifically to finance war. The major examples:
Issued 1917-1919. Patriotic marketing; small denominations for retail buyers. Significant portion of US population participated.
Yields were modest; the appeal was patriotic and inflation-protected (though inflation outpaced).
Issued 1941-1945. More aggressive marketing; mandatory in some workplaces. About 85 million Americans owned them.
Series E bonds were the dominant form; later evolved into Series EE bonds.
UK, Canada, Australia issued similar bonds during both world wars. Various names; similar mechanics.
The term "war bond" is mostly historical. Modern governments issue regular Treasury debt without specific war labeling.
Russia-Ukraine 2022: Ukraine issued specific "war bonds" to fund defense. Limited international uptake; primarily domestic.
Government issues more debt to finance war. Supply increase pressures prices down (yields up).
The US debt-to-GDP ratio rose from ~40% pre-WWI to ~120% post-WWII. War financing dominated.
In some cases, central banks coordinate to keep rates low during wars. The US Fed yielded to Treasury during WWII to keep borrowing costs down.
Investors during these periods earned negative real returns (rates below inflation).
War spending plus rate suppression creates inflation. Bond holders see real returns destroyed.
Some wartime financing involves capital controls — restrictions on moving money out of the country. Bond holders may be effectively locked in.
Existing fixed-rate bonds:
Higher yields available (in many conflict scenarios) but with higher risk.
For US Treasuries: even during major conflicts, sovereign default has not occurred. Real-value risk via inflation is the main concern.
For non-US sovereigns: actual default risk varies dramatically.
Treasury Inflation-Protected Securities adjust principal with inflation. War-driven inflation hurts nominal bonds; TIPS adjust.
For investors expecting wartime inflation, TIPS over nominal Treasuries.
See IBondsAndTreasuries.
Higher yields; default risk varies. Specialist territory.
For developed-market sovereigns (UK Gilts, German Bunds), generally safe but currency exposure matters.
For emerging-market sovereigns, default risk is real. Some default during conflicts.
Russia faced unprecedented sanctions; foreign-held Russian bonds became effectively worthless for Western holders. Russian domestic bond market continued to function but international access was lost.
Ukraine issued specific war bonds; primarily domestic uptake; some international institutional investment.
During conflict, capital flows to perceived safe havens:
These yield less but preserve capital better.
Wartime can compress yield curves (short rates rise; long rates capped). Or steepen them (long rates rise on inflation expectations; short rates anchored).
Specific patterns depend on monetary policy and market structure.
Conflict currencies often weaken. USD often strengthens (safe haven). Bond returns in local currency may not translate to other currencies.
For international investors, currency hedging matters.
Inflation-protected bonds (TIPS, I-bonds) often see increased demand during conflict periods.
Modern Treasury bonds are simply government debt. The patriotic framing of WWI/WWII bonds doesn't apply to current Treasury issuance.
US Treasuries during current conflicts are the same Treasuries as during peace. No special "war bond" instrument exists in modern US markets.
Even "safe" sovereign bonds can lose substantial real value during inflationary wartime.
For US investors during periods of geopolitical tension: