Why Bond Yields Aren't Falling

The U.S. arms-export sector remains both dominant and increasingly fragmented. According to SIPRI, the U.S. share of global arms exports increased from 35 to 43 percent over the past decade. However, CSIS and Pentagon data indicate that U.S. precision-munition stockpiles were reduced by 50 to 80 percent following a single 39-day conflict with Iran. Both data points are accurate. This report addresses the apparent contradiction by distinguishing between realized exports, which reflect past commitments, and the forward-looking signals to which allied governments are now responding: the United States cannot simultaneously supply a peer conflict and arm its allies, prompting a structural diversification of the global arms supply.

Two wars exposed the gap in real time. Ukraine consumed more than three million U.S. 155mm rounds through January 2025, and the 2026 U.S.–Iran war – Operation Epic Fury, a roughly 39-day air-and-missile campaign that ended in a shaky early-April ceasefire, drew down America's high-end munitions so hard that a post-ceasefire CSIS accounting (April 2026) found the U.S. expended more than half its prewar inventory of four of seven heavily-used munitions: THAAD by roughly 80 percent and Patriot interceptors by 45 to 61 percent. The June 2025 Twelve-Day War had already burned about a quarter of the THAAD stockpile as a first warning.

The prevailing response is diversification rather than simple reshoring. Allied nations are expanding domestic production capacity (notably Germany and Poland), while reserve suppliers such as France, India, and South Korea are increasing their output. Europe has committed up to 800 billion euros for rearmament. The structural trend is moving away from exclusive dependence on the United States as a supplier.

A similar logic is evident in central-bank reserve management. The supply chains for precision weapons depend on rare-earth magnets and specialty metals, many of which are concentrated in China. The drive to establish supplier redundancy parallels record levels of central-bank gold purchases, as an increasing proportion of central banks plan to further diversify reserves away from reliance on a single currency.

This report is a companion to the video "The Munitions Drawdown." While the video presents the overarching narrative, this document provides a more detailed examination of the underlying data and sources.

Depleted U.S. munitions stockpiles, combined with a visible production ceiling and a retreat of American security guarantees, are accelerating a structural diversification of global arms supply away from sole dependence on the United States, with second-order effects that reach into commodity demand and reserve composition.

Conviction level: Medium-High. The evidence for stockpile depletion and for allied capital expenditure commitments is robust and well documented. However, uncertainty remains regarding the magnitude and pace of the shift away from U.S. supply, as realized export data continues to favor the United States.

Time horizon: Several quarters to multiple years. This represents a structural rearmament cycle rather than a short-term tactical opportunity. Notably, order books at the largest European producer already extend through 2034.

Potential invalidation: If U.S. 155mm artillery production reaches and sustains 100,000 rounds per month, and interceptor lead times are significantly reduced, the supply-constraint premise underlying allied diversification would be negated.

For three decades, abundant U.S. munitions production underwrote allied security. Europe could under-invest in its own defense industrial base because the American arsenal was assumed to be deep, fast, and available. Two events in the span of a year inverted that assumption, and a third confirmed the new direction.

The first was Ukraine. From the start of Russia's full-scale invasion in 2022 through January 2025, the U.S. shipped more than three million 155mm artillery rounds to Kyiv. That single conflict drew down stockpiles built for a different era of warfare, one that did not anticipate the industrial-scale artillery consumption of a sustained land war in Europe.

The second was the 2026 U.S.–Iran war. The June 2025 Twelve-Day War was the first warning: over twelve days from June 13 to June 25, U.S. forces fired more than 100 THAAD interceptors, with some estimates reaching 150, and early accounting put THAAD use at roughly a quarter of the stockpile. Then came Operation Epic Fury, a far larger U.S.–Iran air-and-missile campaign that ran roughly 39 days from late February 2026 to a shaky early-April ceasefire and struck more than 13,000 targets. A post-ceasefire accounting by CSIS in April 2026 was far worse than the 2025 episode: for four of seven heavily-used munitions the U.S. may have expended more than half its prewar inventory, with THAAD around 80 percent (about 290 of 360) and Patriot interceptors at roughly 45 to 61 percent (between 1,060 and 1,430 of about 2,330), alongside about 850 of 3,100 Tomahawks and roughly 1,000 of 4,400 JASSMs. Each THAAD interceptor costs about $12.7 million. The replenishment math is brutal: THAAD interceptors ordered in 2021 are not slated to enter inventory until April 2027, the current THAAD acquisition adds only 25 to 37 missiles a year, and CSIS estimates rebuilding the seven munitions to prewar levels will take one to four years.

The third was the policy pivot. In May 2026, the Pentagon announced the withdrawal of roughly 5,000 troops from Germany over six to twelve months, as part of a force posture review ordered by the Defense Secretary, leaving more than 30,000 in place but reversing a build-up that began after 2022. The same review halted an in-progress deployment of about 4,000 soldiers to Poland and raised the possibility of further pullbacks from Spain and Italy. The drawdown arrived amid open friction between Washington and European capitals over the 2026 Iran war.

The message to allied governments was clear: U.S. munitions are constrained, and American military presence is simultaneously diminishing. This concurrence transformed a defense-trade narrative into a broader macroeconomic thesis. According to our internal macro classification, the current environment is characterized as a Reflation regime, with both growth and inflation running above trend (94% probability as of May 24, 2026). In this context, large-scale, debt-financed defense expansion contributes to persistent inflationary pressures rather than addressing a demand shortfall.

A deeper structural dimension is also evident. Since World War II, U.S. security guarantees have enabled allied governments to under-invest in defense, reallocating fiscal resources to social programs, while simultaneously supporting global demand for dollar-denominated assets. Countries benefiting from the American security umbrella have had strong incentives to hold dollars and related reserves. As these guarantees recede, two critical questions emerge. First, from a military perspective: can Europe maintain its own defense without U.S. support, and will this effort foster greater European Union autonomy or reveal internal divisions over burden-sharing and command? Second, from a monetary perspective: if security guarantees underpin dollar primacy, does their withdrawal weaken the established link between alliance membership and dollar reserve holdings? While neither issue is fully resolved, both have become central considerations in the wake of recent stockpile depletion events tracked in this report.

The case rests on a measurable gap between what the U.S. can produce and what modern conflict consumes, set against the pace at which allied and reserve suppliers are scaling up.

Exhibit 1: A single 39-day war consumed a generation of high-end inventory. CSIS's April 2026 post-ceasefire accounting of Operation Epic Fury found that of seven heavily-used U.S. munition classes, four had been drawn down by more than half. THAAD interceptors fell about 80 percent (290 of 360); Patriot interceptors 45 to 61 percent (1,060 to 1,430 of 2,330); Tomahawk cruise missiles about 27 percent (~850 of 3,100); JASSM cruise missiles about 23 percent (~1,000 of 4,400). CSIS estimates rebuild times of one to four years across these classes. At current acquisition rates, THAAD alone adds only 25 to 37 interceptors a year. The June 2025 Twelve-Day War, which had already consumed roughly a quarter of THAAD, is the labeled precursor; Epic Fury is the headline event.