Research Note
The Repricing
What the federal interest bill responds to, and what it does not.
The minutes of the July meeting, released on 19 August, record a Committee that held the federal funds target at 3.50 to 3.75 percent on a vote of nine to three, with Hammack, Kashkari and Logan each preferring a quarter point increase. The question in front of the market has quietly inverted. It is no longer when the Fed cuts. It is whether the Fed hikes.
Both versions of that question are usually asked as though the answer set the government's cost of borrowing. It does not, and the reason is arithmetic rather than interpretation. A policy rate applies to money borrowed today. An interest bill is paid on a stock of debt borrowed over the preceding thirty years, and that stock reprices when it matures rather than when a decision is announced.
What the Policy Rate Actually Sets
The Treasury publishes the average interest rate it actually bears on each class of its debt, every month, which makes this checkable rather than arguable. The bill rate peaked at 5.38 percent in September 2023 and has since fallen to 3.758 percent, a decline of 1.62 percentage points. Over the same period the average rate on all marketable debt rose from 3.016 percent to 3.443 percent.
The Bill Rate Fell and the Debt Kept Getting Dearer
Average interest rate borne by US Treasury marketable debt by security type, at each 30 September fiscal year end and at 31 July 2026
The bill rate is 1.62 percentage points below its September 2023 level. The rate on all marketable debt is 0.43 points above it.
Source: US Treasury, Average Interest Rates on US Treasury Securities.
The two lines move in opposite directions for five years and then very nearly meet. That convergence is the whole subject of this note. The bill line is the part of the debt that follows the Fed, and it has come down. The note line is the part that follows its own maturity schedule, and it has risen every single year since 2021, from 1.450 percent to 3.309 percent, without pausing for the direction of policy at any point along the way.
The rate on the note book is still below the rate on the bill book. A note maturing this month is therefore being replaced by debt that costs more than the debt it retires, and that remains true whether the next move is a cut, a hold or an increase.
The Stock Reprices on a Schedule
How much of the debt follows the Fed at all is a question of composition, and it is smaller than the attention paid to the policy rate implies.
Three Quarters of the Marketable Debt Reprices Only on Maturity
US Treasury marketable debt outstanding at 31 July 2026 by security type, US dollars billion
Bills mature within a year by construction and floating rate notes reset weekly; together they are 24.3 percent of the total. The five classes shown come to $31,452bn against $31,455bn of marketable debt, the difference being a $3.6bn Federal Financing Bank balance.
Source: US Treasury, Monthly Statement of the Public Debt.
Bills are 22.2 percent of the marketable stock. Adding floating rate notes, which reset weekly, brings the genuinely rate-sensitive share to 24.3 percent. The remaining three quarters, some $23.8tn of notes, bonds and inflation protected securities, carries a coupon fixed at issue. For that portion the FOMC sets the rate on new issuance and on nothing else.
The Curve Sits Above the Book
That would be an unremarkable observation if new issuance were priced near what the existing stock costs. It is not.
Every Tenor on the Curve Costs More Than the Debt It Would Replace
US Treasury constant maturity yields at 18 August 2026, against the average interest rate borne by all marketable Treasury debt at 31 July 2026
Drawn flat across the curve because it is one number, not a term structure: it is what the existing stock costs, set against what replacing any part of it costs today.
Source: Federal Reserve H.15; US Treasury.
On 18 August the entire Treasury curve sat above the 3.443 percent the government pays on its marketable debt. The 3-month yield was 3.86 percent and the 30-year 5.28 percent, so the gap runs from about 0.4 points at the front to 1.8 points at the back. There is no tenor at which the Treasury can refinance maturing debt at what that debt currently costs.
This is what makes the direction of the interest bill largely independent of the policy decision. A steeply positive curve means the coupon book reprices upward as it rolls, and the further out the tenor the larger the step up. A cut at the front end does not reach the part of the curve where most of the debt is refinanced.
The Size of the Two Forces
The two forces can be sized against each other directly, and they are not close to the same order.
A Rate Cut Is the Smaller of the Two Forces
Annual change in US Treasury interest cost from a 100 basis point cut applied to floating rate debt, against refinancing the coupon book at 18 August 2026 yields. US dollars billion per year
The fully repriced steady state, not a one-year effect. The coupon book reprices only as it matures, and this exhibit does not establish over what period.
Source: Seven Measures calculations on US Treasury and Federal Reserve data.
A full 100 basis point cut, passed through to every bill and floating rate note the Treasury has outstanding, saves about $76bn a year. Refinancing the note book at the 5-year yield adds about $172bn, and the bond book at the 30-year adds about $101bn. The repricing is roughly three and a half times the size of the cut, and it runs the other way. A Committee that delivered a full point of easing and then watched its coupon book roll would still be looking at an interest bill some $196bn a year higher.
Some of this has already happened. Interest on debt held by the public ran $900.1bn in the ten months to 31 July, against $535.7bn in the same ten months of fiscal 2023, an increase of 68 percent over a period in which the bill rate fell by more than a point and a half. That figure is offered as corroboration and not as proof: the debt itself grew over those three years, so the rise in dollars paid reflects both a larger stock and a dearer one, and this note has not separated the two.
Investment Implications
The firm reads three things from this. First, that the hike against hold debate now occupying the market is close to immaterial for the fiscal path, because it operates on a quarter of the marketable debt and the other three quarters is repricing upward regardless. Positioning the fiscal outlook on the FOMC decision is positioning on the smaller variable.
Second, that the long end is where the fiscal arithmetic is actually decided. A 30-year at 5.28 percent against a bond book at 3.442 percent is the widest gap on the curve and applies to the debt that takes longest to escape. Term premium is the variable worth underwriting here, not the policy rate.
Third, that the interest bill will keep rising through the next easing cycle if there is one, and that this should be treated as the base case rather than as a risk. A market that reads a cut as fiscal relief has misread which part of the debt the cut touches.
What would change this reading is a curve that inverts far enough, for long enough, to bring refinancing costs below the existing average coupon. That has not happened at any tenor on the evidence here. The work this note has not done, and which would sharpen it considerably, is the maturity schedule: how much of the coupon book reprices in each of the next five years, and at what average coupon it leaves.