Have you ever been to a party where the hosts run out of food and beverages? I suspect most of us have. While there are occasions when some subset of attendees go to the store to purchase more refreshments, ordinarily booze, folks often hit the bricks. At least that has been my experience.
What is the old expression? It was fun while it lasted?
As most people who are prone to read economic newsletters probably already know, interest rates have been on a tear in September, and I am not simply referring to the Federal Reserve. No. According to my handy Bloomberg Terminal, the yield to maturity on the 10-year U.S. Treasury note was 4.752% at the end of August 2026. It had been 4.171% at the close of trading last Dec. 31. (1)
Obviously, that is a significant move in rates. However, on Sept. 24, the 10-year Treasury ended the trading session at 5.202%. Trust, that 0.45-percentage-point increase since the end of last month is, shall we say, a little unusual, particularly since the economic data hasn’t changed dramatically over the last couple of months, in aggregate.
To be sure, some folks might argue with that last sentence, but it would largely be over the meaning of the word dramatically.
But why the recent sharp spike in interest rates?
Wouldn’t the recent Fed rate hike on Sept. 16, 2026, put downward pressure on expected future levels of inflation? If so, why have yields on the longer end of the yield curve increased while the Fed has embarked on an inflation-fighting campaign?
It is a good question. One possible answer is that the supply of debt has simply outpaced the demand for it. As such, bond prices have gone down and interest rates have gone up. That is the way the math works for a bond’s price and yield, all else equal. Or, put another way, bond prices and interest rates move inversely.
It is basic economics, seriously. When supply exceeds demand at a given price, the price has to adjust to bring the market back toward equilibrium. (2) Fair enough, but why?
Consider this: According to my Bloomberg, again, the U.S. Money Supply (M2) was $22,092.60 billion in September 2025. It was $23,342.80 billion for August 2026. (3) That is growth of $1,250.20 billion over those 11 months. As a point of clarification, Investopedia.com defines M2 as such: “The Federal Reserve’s M2 metric provides an important snapshot of money circulating in the U.S. economy, encompassing cash, checking deposits, and easily accessible funds.” (4)
Basically, it is the supply of “cash money” sloshing about the U.S. economy.
With that number in mind and said Bloomberg at my fingertips, the federal government’s official fiscal year-to-date deficit through the end of August 2026 was, get this, $1,965.59 billion. In case you weren’t aware, Washington’s fiscal year ends Sept. 30.
Therefore, over the last 11 months and through the end of this past August, the federal budget deficit was, get this, $715.39 billion greater than the growth in the money supply in the U.S. economy. To put that in perspective, according to the IMF, that number is roughly similar to the GDP (PPP) of Sweden. (5)
Remember, since the Treasury is adding to its accumulated debt, it has to attract new dollars when it issues more securities. Put another way, more new money has to flow into the Treasury market.
Now, the knee-jerk reaction might be: “So what, Norris? Treasury debt isn’t included in M2, so you are comparing apples to oranges or something along those lines.”
That might be the case, as it pertains to direct ownership of Treasury securities. No argument. However, retail money market mutual funds are included in M2 and a fair amount of Treasury bills will end up in those products OR as collateral for the repurchase agreements in those products. In fact, and per my AI Overview, the Investment Company Institute reported there is around $6.53 trillion invested in “government money market funds.” (6)
As such, may I submit the comparison is NOT apples to oranges. It is perhaps more analogous to comparing Golden Delicious apples and Granny Smiths. If you will agree to that, perhaps you might like this next comparison.
At the end of 2000, M2 in the United States was an estimated $4,927.3 billion. The accepted “total public debt outstanding” was $5,766.1 billion at that time. (7) That means debt outstanding was around 117% of the accepted money supply.
This past August, the respective numbers were, again, $23,342.80 billion and $40,175.64 billion. That works out to be about 172%. Obviously, this means the increase in the supply of debt has grown much faster than the supply of, well, ready cash.
All of these comparisons of mine are really to drive home a basic point. At some point the supply of public debt will exceed the public’s demand for it. When that happens, interest rates will rise to a new market equilibrium, which might make it very disadvantageous for Washington to persist in its profligacy.
Since few on Capitol Hill likely have the steel to suggest sharply cutting expenditures, we will likely see more sensible, if that is the right word, growth in them. Furthermore, it could be a minute or two before Congress passes any massive fiscal stimulus package.
In essence, we could be entering into a period when government grows at a slower pace than the private sector. Fiscal realities could increase pressure for slower growth in federal spending.
This means things like the CARES Act, the American Rescue Plan Act, the Inflation Reduction Act and the American Recovery and Reinvestment Act might be fewer and smaller in the future.
Hey, 2% debt is a lot easier to service than 5%, if you catch my drift.
So, in the end, I am not sure if investors have completely run out of money for new Treasury issuance. However, if recent trends in bond prices and interest rates persist, that might give us a clue.
Thank you for your continued support. As always, I hope this newsletter finds you and your family well. May your blessings outweigh your sorrows on this and every day. Also, please be sure to tune into our podcast, Trading Perspectives, which is available on every platform.
John Norris
Chief Economist
Sources:
- Bloomberg – US 10-Year Treasury Yield Breaches 5% Threshold. September 11, 2026.
- Investopedia – Law of Supply and Demand in Economics: How It Works. February 18, 2026.
- Trading Economics – United States Money Supply. Accessed September 25, 2026.
- Investopedia – What is Included in the M2 Money Supply? May 19, 2026.
- International Monetary Fund – Sweden. Accessed September 25, 2026.
- Investment Company Institute – Money Market Fund Assets. September 24, 2026.
- U.S. Department of the Treasury, Bureau of the Fiscal Service – Historical Debt Outstanding. Accessed September 25, 2026.
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