Two numbers published yesterday tell one big story about the U.S. economy. First, the July CPI: Headline inflation: +3.4% YoY (down slightly from 3.5%), +0.1% MoM. Core CPI: +2.6% YoY. The print came in right on consensus. No surprises, which is why equities rallied early and the Fed likely has cover to stay on hold in September. Second, a 10-Year Treasury Auction: $42B in notes sold at a high yield of 4.68%, up from 4.58% last month and the highest since 2007. Bid-to-cover came in at 2.5, solid but softer than the prior 2.6. Demand was there, but investors are looking for significantly more compensation to lend to the government for a decade. What’s the conection between both data points? Inflation is cooling at the margin, but it’s still running well above the Fed’s 2% target. Meanwhile, the bond market is repricing the cost of holding U.S. debt. Net interest costs have already become the second-largest category of federal spending at $827B through June, surpassing Medicare and defense. At 3.2% of GDP, we’ve already blown past the 1991 peak, and CBO projects 4.6% by 2036. The CPI gives the Fed breathing room. The Treasury auction reminds us why that breathing room matters: every basis point on the 10-year is a signal about how the world prices U.S. fiscal risk. With the Strait of Hormuz still closed, oil near $84, and geopolitical uncertainty elevated, the market is clearly embedding a higher term premium into long-dated Treasuries. The bottom line: We’re in a delicate equilibrium. Inflation isn’t hot enough to force the Fed’s hand, but it’s sticky enough to keep long yields elevated. And those elevated yields feed directly into the fastest-growing line item in the federal budget. Next stop: tomorrow’s PPI and 30-year auction, which may tell us whether the term premium will keep climbing.

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