The US government posted a $345 billion deficit in August, with receipts of $344 billion overshadowed by $689 billion in spending. The largest outlays were Medicare at $141 billion and Social Security at $134 billion, but what stands out is net interest at $93 billion, now the third-largest expense. This highlights the growing pressure that rising borrowing costs are placing on federal finances.

The Federal Reserve is expected to cut rates by 25 basis points in September, but history suggests it wont be that straight forward. In September 2024, the Fed eased policy by 100bps only to see yields on the long end move sharply higher. The 30 year Treasury jumped from 3.9% to 5%, and today sits at 4.7%.

With recent data pointing to an acceleration in inflation, the risk is that cutting rates could fuel further price pressures. That would force yields higher, increase debt servicing costs and potentially deepen the fiscal hole, creating a challenging backdrop for policymakers and markets alike.

Markets are responding decisively. Gold has surged to new record highs, just below $3,670 per ounce, marking a year-to-date gain of almost 40%. Bitcoin is also gaining traction, climbing above $115,000 as investors search for alternatives in an environment where debt sustainability is becoming a bigger concern.