The near-term rate path is close to a coin toss, but the long-term fiscal trajectory is high-conviction. Rising debt, an unfavorable r-g dynamic, and a blocked spending/revenue picture point to an inflationary resolution that structurally widens the 30yr term premium, while the 5yr stays anchored to the Fed. Express via a DV01-neutral 5s30s steepener that harvests the fiscal premium while staying agnostic on the front end.
On Rates
We have a lot of near-term uncertainty and a genuine shift in sentiment on the path. We started the year with heavy cut pricing; now the probability of one hike before year-end is around 60%. My own base case has moved from one cut to holding through the year. But despite that front-end noise, my conviction sits in the longer-term structural story — the fiscal trajectory and the rising national debt. The trade is built to monetize that structural view while staying agnostic on the near-term front end, which is exactly where I have the least edge.
The Debt Paradigm
Start with where we are: federal debt held by the public is already ~100% of GDP, a level we haven't seen since just after WWII. This trajectory doesn't show signs of slowing. On CBO's post-OBBBA path it climbs to ~108% by 2030 and ~175% by 2056, with deficits widening from ~6% of GDP today toward 9%+. The OBBBA alone added roughly 15–20pp to the long-run path versus the prior baseline.
The composition of the deterioration is what matters for rates. The primary deficit is relatively stable around ~2% of GDP, but net interest is the line that explodes — already ~3.2% of GDP, more than defense or Medicare, and rising toward 5%+ by mid-century. Two tools historically used to solve the debt problem no longer work.
The r-g term. The post-WWII drawdown — debt/GDP from ~106% to ~23% — was overwhelmingly an r<g story, helped by repression and surprise inflation, not growth; the academic work (Acalin-Ball, the IMF's WWII reassessment) is clear that growth did almost none of the work. We don't have that tailwind now. CBO has the average interest rate crossing above nominal growth (r>g) by the mid-2040s, with structural growth slowing on demographics and a shrinking labor force. Once r>g, you need a primary surplus just to stabilize debt — and we're running a primary deficit.
The spending constraint. There's almost no room on the spending side. Entitlements plus net interest plus defense are ~75% of the budget and growing, leaving little discretionary to cut, as DOGE and the fiscal hawks demonstrated. By elimination, the only arithmetic that closes the gap is revenue: the US is a low-tax economy and lifting the tax take to the OECD average would more than do it — but that's politically blocked. So the realistic menu narrows to the inflationary routes: tolerate higher inflation and lean on some form of financial repression.
That's the key inference for the trade. Because the credible resolution is inflationary, the market should price a structurally higher inflation expectation and — more importantly — a higher inflation risk premium: compensation for inflation being more volatile and less anchored under a fiscally-dominated regime. Both feed the term premium, and term premium scales with duration, so the 30yr bears it disproportionately. It carries the full horizon over which this resolution plays out, which the 5yr does not. That's why I see a 5–30yr steepener as the right expression.
The Flow Layer — Supply and Demand
This is what amplifies and accelerates the drift, and adds the near-term compression.
Supply. The fiscal arithmetic above feeds mechanically into rising coupon issuance, and the duration the private market has to warehouse grows with it. More importantly, the marginal absorber is disappearing: the Fed is in QT, and under Warsh, QE is effectively off the table near-term — he's signaled a smaller balance sheet, an MBS exit, and a preference to hold only short-dated paper. That's not just less support; it's a duration-shortening of the Fed's own book, a reverse-twist that pulls a price-insensitive holder out of the long end specifically. The 30yr has to clear in the private market with no buyer of last resort capping it. The one swing factor is issuance mix — Treasury has been blunting long-end pressure by funding short, so any move to term out the debt is a discrete bearish catalyst for the back end.
Demand. The buyer composition is deteriorating in a way that steepens the response to every unit of supply. The historically price-insensitive holders — foreign central banks, the Fed — are retrenching, and the marginal buyer is increasingly price-sensitive (hedge funds, households via ETFs, real money). A more price-sensitive marginal buyer means a steeper curve reaction to issuance. Layered on top, the convenience yield — the safe-and-liquid-asset subsidy that's let the US borrow cheaply — erodes as supply grows, and that erosion concentrates in the medium-to-long end while bills retain their money-like premium. So the 30yr is simultaneously gaining term premium and losing its convenience subsidy.
Risks
Bull-flattener in a hard landing. A genuine growth scare or flight-to-quality bid pulls the whole curve down and flattens as duration rallies into safety. Given soft labor data, this is the main near-term risk.
The repression flip. If the basis trade unwinds and forces the Fed into "market-functioning" intervention, or a Fed–Treasury arrangement leans on the long end, the cap reappears and the 30yr gets suppressed despite the fundamentals. Warsh makes this lower-probability near-term, but it's the snapback tail — not zero — and the 30yr's leveraged positioning means the convexity cuts both ways; the gap risk is violent in either direction.
Carry and roll. Depending on curve shape and funding, the steepener can bleed. Size for the carry if the thesis takes time.
Catalysts
- Quarterly refunding announcements and any shift toward terming out issuance.
- Warsh's response to the first real long-end dysfunction event — hold the line (thesis confirmed) vs. intervene (thesis inverted). Single most important observable.
- Inflation prints and breakevens, confirming the inflation-risk-premium build.
- CBO updates and the post-OBBBA deficit trajectory.