US interest outlays hit record as deficit widens—markets price Sept cuts, but will term premium and a steepening curve veto valuations?

The most important “print” of the week wasn’t CPI. It was arithmetic. The Treasury’s latest monthly statement shows the federal deficit widening and net interest outlays hitting a fresh record trailing 12 months. Screens celebrated softer inflation and a September Fed cut; the bond market quietly sharpened its pencil. The Fed can lower the price of overnight money. The market sets the price of time.

Here’s the provocation: we are sliding into interest‑only economics, and it won’t be the front end that breaks the narrative—it will be the long end. Every basis point of policy relief soothes funding costs at the margin, but it doesn’t erase a coupon stack that resets higher as old debt rolls. Nor does it shrink an issuance calendar that’s tilting toward longer maturities just as the price‑insensitive buyers of the QE era have stepped back. Result: term premium—the hazard pay investors demand to hold 10s and 30s—drifts up even as policy eases. Translation: a stealth steepener.

That shape is not a vibe; it’s a tax:

- Mortgages: Relief underwhelms when the 30‑year refuses to follow fed funds and the MBS basis widens on prepayment risk. “Affordability” doesn’t improve on press conferences.  

- Capex: Hurdle rates don’t fall as far as equity multiples pretend. Boardroom math answers to long yields, not headlines.  

- Portfolios: The beloved 60/40 stops diversifying when bonds won’t hedge stock euphoria; long‑duration tech still takes its denominator from the 10‑year, not dot plots.

Arithmetic also collides with the sticky bits of inflation. Goods disinflation did the heavy lifting; services (wages, insurance, utilities, transport) move in quarters, not weeks. If easier financial conditions (stocks up, spreads in, dollar down) re‑warm demand at the margin while Treasury refunding stays heavy, breakevens can edge higher even as real yields slip. That’s the “liquidity over discipline” tell—and the context in which long buyers ask for more yield to hold time.

Meanwhile, corporate P&Ls aren’t insulated. Goods deflation padded 2023 margins; 2024 has plateauing services costs, freight mischief, and energy that still has a vote. If unit growth cools into a cut narrative, operating leverage runs backward. Watch guidance for the euphemisms—“mix,” “efficiency,” “selective promotions”—that translate as “defending share while gross margin bends.”

Why the bond market may veto the party:

- Supply: A heavier long‑end remit means more 10s/30s into choosier balance sheets. Auctions with fat tails are term‑premium ballots.  

- Demand mix: Fewer price‑insensitive buyers (central banks, banks stuffed with reserves) and more real‑money investors who demand compensation for duration and policy uncertainty.  

- Policy noise: Post‑Chevron litigation risk and an election cycle fatten the policy risk premium embedded in long yields.  

What to watch (plumbing over platitudes)

- 10s/30s auctions: bid‑to‑cover, tails, dealer take‑downs—the long end’s veto in real time.  

- Breakevens vs. real yields: rising breakevens with falling reals says “liquidity” is outrunning discipline—fertile ground for a steepener.  

- Mortgage spread to the 10‑year and MBS basis: real household relief requires spread compression, not just a friendlier Fed.  

- Services PCE/PMI prices paid & charged: proof the sticky bits are actually cooling.  

- Treasury’s long‑end share and buyback/issuance mix: does the DMO lean into 30s/linkers?

Positioning without romance

- Keep duration honest; if you must own long bonds, demand convexity and quality. Fund selective steepener hedges with high‑quality carry.  

- Tilt equities toward cash generators with near‑term cash flows and pass‑through power; pair long‑duration growth with beneficiaries of a higher long end (select banks/insurers).  

- In housing, own scale builders and key suppliers—but hedge the 10‑year and demand real planning/permit progress, not speeches.  

- Prefer bottlenecks over slogans: grid gear (transformers, HV cable), semis packaging/HBM—scarcity monetizes regardless of rate chatter.

Cuts can soothe screens. Net interest and issuance set the coupon. If the long end refuses to play along, today’s liquidity jubilee will come with a term‑premium tax—assessed on mortgages, capex, and every spreadsheet that priced 2025 cash flows as if time were free.