Liquiqui

Fiscal dominance

When public debt and its service become the binding constraint on economic policy

Thesis

Is fiscal policy starting to constrain monetary policy?

Index

The six measurable criteria, standardized and equal-weighted, updated daily — 100 = January 2003, higher means more fiscal dominance

Fiscal Dominance Index
125.7
1 wk
↓ -0.3
1 mo
↑ +1.3
1 yr
↑ +9.2

Source: Liquiqui, from FRED / BEA / NY Fed / US Treasury

Where each constituent stands today, in standard deviations from its own average since 2003

  • Real 10-year yieldDaily · Oct 16, 2026+1.7
  • Debt / GDPDaily · Oct 15, 2026+1.3
  • Primary deficit / GDPQuarterly · Apr 1, 2026-0.4
  • Interest / revenueQuarterly · Apr 1, 2026+2.2
  • Term premiumDaily · Oct 9, 2026+1.5
  • Inflation expectationsDaily · Oct 16, 2026+0.6
Notes
What is happening
The index stands at 126.0 on 9 October 2026 against a base of 100 in January 2003, a tenth below the record of 126.1 set the day before. The trough sits around 92-93 across the whole 2015-2019 stretch — the low-rate era, when debt climbed without markets demanding any premium at all. The turn came in 2022: roughly 97 in late 2021, 114 by late 2023, 124 in January 2025 — a peak surpassed in mid-September 2026 as the 10-year crossed 5%, then left behind in October as the term premium crossed 1%. Today interest expense relative to revenue is the most stretched constituent (+2.2 standard deviations), followed by the real 10-year yield (+1.9) and the term premium (+1.6), and the primary deficit the only one still below its historical average (−0.4).
Why it matters
Each of the six indicators below tells part of the story, but none is sufficient alone: rates can rise without a fiscal problem, and high debt stays sustainable as long as markets do not charge for it. This index combines them at equal weight to answer one question — is the pressure building or easing? Each constituent is standardised first (distance from its own average, scaled by its own volatility), without which debt/GDP, which moves across 75 points, would drown out the term premium, which moves across two.
What's driving it
Interest at over a fifth of revenue and a 10-year real yield near 2.9% do most of the lifting; the term premium, above 1% since October, and debt/GDP add the rest, while the primary deficit still subtracts a little.
What to watch
The lowest reading in the entire record is 81, on 9 March 2020 — precisely as the deficit was about to reach 24% of GDP. Yields, the term premium and inflation expectations were all collapsing together: markets were pricing deflation and a flight to safety, the exact opposite of fiscal dominance. That is the distinction the index exists to make, and that no single indicator makes on its own — a violent fiscal shock is not fiscal dominance while the market refuses to charge for it. The current regime is the mirror image: a more moderate deficit, but every market price stretched at once.

Signals

Each criterion scored on its level and its direction

CriterionCurrent ReadingTrendComment
Debt Dynamics (r > g)in the index
Does the real interest rate paid on debt durably exceed the economy's real growth rate?
High
↑
Real 10-year yield ≈2.9% (5.22% nominal on 8 October 2026 minus 2.33% breakeven) versus the CBO's ~1.8-2% real potential growth estimate: the r > g condition holds, and the gap has widened since the Fed's 16 September hike (3.75-4.00% target range, longer-run rate lifted to 3.2% in the new projections).
Debt Servicein the index
Is the interest/revenue (or interest/GDP) ratio becoming the dominant budget line, crowding out other priorities?
High
↑
Net interest at 21.1% of federal receipts (Q2 2026, accounts revised on 30 September), above the 20% threshold often cited as a tipping point — more than double the pre-pandemic level.
Political Pressure on the Central Banktable only
Is the central bank facing explicit public or institutional pressure to subordinate policy to the fiscal situation?
High
↓
Still explicit, but less institutional: the White House keeps calling for a policy rate of 1% “or less”, yet the Department of Justice investigation of Jerome Powell was dropped in April 2026, Kevin Warsh took over as Fed Chair on 22 May, and the FOMC raised rates on 16 September by a unanimous 12-0 vote over the President's stated objection.
Term Premiumin the index
Are investors starting to demand compensation for fiscal risk itself, beyond policy-rate expectations?
Moderate
↑
The 10-year term premium sits at 1.08% (2 October 2026), sharply up from the near-zero levels of the 2010s-2020s, and now above the ~1% level widely viewed as genuinely alarming — a first since 2011.
Debt Holder Structuretable only
Is debt increasingly held by price-sensitive buyers (hedge funds, households) rather than captive holders (the central bank, official foreign reserves)?
Low/Moderate
→
As a share of gross federal debt, the Fed fell from 20.4% (Q4 2021) to 11.9% (Q2 2026) as QT ran, and foreign holders stayed roughly flat (25.7% → 23.9% in Q1 2026), while domestic private investors jumped from 32.4% to 45.0% — the Fed ended QT in December 2025, which could stabilize this trend.
Inflation Criterionin the index
Does inflation stay anchored, or does the central bank end up accommodating government borrowing at the cost of durably higher inflation?
Low
↑
CPI inflation is running at 3.4% year-over-year as of August 2026, above the Fed's 2% target — enough to prompt a rate hike on 16 September — but far from historical fiscal-dominance or hyperinflation episodes; the market's 10-year breakeven of 2.33% (9 October) suggests expectations remain anchored.

Raw data

The seven series behind the signals, latest reading first

10-Year Government Bond Yield

10-Year Treasury Yield
5.10%
1 wk
↓ -0.12%
1 mo
↑ +0.10%
1 yr
↑ +1.05%

Source: US Treasury / FRED

Notes
What is happening
The US 10-year (FRED series DGS10) stood at 5.22% on October 8, 2026, up from 5.01% on September 18 and 4.70% on August 24, after the Fed raised its target range to 3.75-4.00% on September 16. Adjusted for the 10-year breakeven inflation rate (2.33%, see the breakeven indicator below), the real yield works out to roughly 2.9% — well above the CBO's long-run real potential growth estimate for the US (roughly 1.8-2% a year), which is precisely the r > g configuration described in the intro.
Why it matters
The 10-year government bond yield is the marginal cost at which the government finances its long-term debt today — compared against economic growth, it shows whether r > g (interest rate above growth), the central condition for fiscal dominance, is taking hold.
What's driving it
Sticky inflation above 3%, heavy Treasury issuance and foreign buyers stepping back have pushed the 10-year above 5.2%, and the Fed raised rather than cut on 16 September.
What to watch
Level to watch: the average interest rate actually paid across all outstanding federal debt is still only about 3.2% (annualized net interest divided by total debt outstanding; the Treasury's own figure is 3.49% on interest-bearing debt in August 2026), since some debt was issued cheaply in 2020-2021. As long as the marginal 10-year rate sits above that average, the interest bill will keep rising mechanically as debt rolls over, even without any new net issuance.

Debt / GDP

Public Debt / GDP
121.2%
1 wk
↓ -1.4%
1 mo
↓ -1.4%
1 yr
↑ +2.4%

Source: US Treasury / FRED

Notes
What is happening
Total gross federal public debt (including intragovernmental holdings) stood at 121.2% of GDP in Q2 2026, up from 118.2% a year earlier. The ratio has hovered around 120% since 2023, far above any level seen between 1966 and 2019 — the pandemic-era spike of 132.7% (Q2 2020, distorted by the one-off GDP collapse) aside. FRED series GFDEGDQ188S, extended by one quarter from the Treasury's daily debt figure and GDP.
Why it matters
The debt/GDP ratio remains the most closely watched debt-sustainability gauge: it puts the absolute debt level in the context of the economy's capacity to carry it, and its trajectory — not its instantaneous level — is what determines whether markets start demanding a risk premium.
What's driving it
Deficits near 6% of GDP against nominal growth near 5%: the numerator grows faster than the denominator every year.
What to watch
Level to watch: the trajectory more than the level — the CBO projects a continued climb absent budget reform, and a ratio that keeps rising while the primary deficit doesn't close (see above) is the textbook definition of an unstabilized debt dynamic.

Primary Deficit / GDP

Primary Deficit / GDP
1.3%
1 wk
↓ -0.2%
1 mo
↓ -0.2%
1 yr
↓ -0.8%

Source: BEA (NIPA), via FRED

Notes
What is happening
Per BEA NIPA data (via FRED, series FGRECPT/FGEXPND/A091RC1Q027SBEA/GDP), the annualized federal primary deficit ran at roughly 1.3% of GDP in Q2 2026 (receipts $6,056B, expenditures $7,755B including $1,280B of net interest, after the BEA's annual revision of 30 September), for a 5.2%-of-GDP total deficit.
Why it matters
The primary balance (deficit excluding interest) shows whether debt would keep growing even if debt service were free — a persistent primary deficit means the debt dynamic no longer depends only on interest rates but on a structural gap between spending and revenue.
What's driving it
Spending on Social Security, Medicare and defence grows faster than receipts, and the 2025 tariffs brought in less than budgeted.
What to watch
Level to watch: getting back to primary balance (0% of GDP) is what's needed to stabilize the debt/GDP ratio if the real interest rate stays above real growth (see the 10-year yield indicator below) — instead, the CBO projects the primary deficit persisting through the decade.

Interest Expense / Revenue

Interest Expense / Revenue
21.1%
1 wk
↑ +0.0%
1 mo
↑ +0.0%
1 yr
↓ -0.0%

Source: BEA (NIPA), via FRED

Notes
What is happening
Per the same BEA/FRED series, net federal interest payments amounted to roughly 21.1% of federal receipts in Q2 2026 ($1,280B of interest on $6,056B of receipts), up from roughly 8-9% pre-pandemic — the ratio has more than doubled in five years.
Why it matters
The share of tax revenue consumed purely by interest payments directly measures remaining fiscal space: the higher this ratio, the more the government must borrow just to service existing debt, independent of any new spending program.
What's driving it
A debt stock refinanced from the 1-2% coupons of the 2010s to 4-5% today: the average rate on the debt rises each year as old bonds roll.
What to watch
Level to watch: 20% of revenue is the threshold several economists (including former US Treasury officials) cite as the point where debt service starts meaningfully crowding out other budget priorities — a threshold already crossed.

Term Premium

10-Year Term Premium
1.07%
1 wk
↓ -0.01%
1 mo
↑ +0.17%
1 yr
↑ +0.57%

Source: Federal Reserve Bank of New York (ACM model)

Notes
What is happening
Per the Federal Reserve Bank of New York's Adrian-Crump-Moench model (FRED series THREEFYTP10), the 10-year term premium stood at roughly 1.08% (108 basis points) on October 2, 2026, up from 0.96% on September 11 and 0.87% in late August — above 1% for the first time since 2011, and a sharp rise from the near-zero, sometimes negative, levels seen through the 2010-2020 decade.
Why it matters
The term premium is the part of the 10-year yield not explained by expected future policy rates — it's the extra compensation investors demand for the risk of holding long-dated debt. A structurally rising term premium signals markets are starting to demand payment for fiscal risk, not just rate risk.
What's driving it
The Fed no longer buys, foreign reserves diversify, and the supply of long bonds keeps growing: investors ask to be paid for duration again.
What to watch
Level to watch: the premium crossed 1% in early October; staying above that line would mark a return to risk-premium levels closer to the 1990s-2000s, before the post-financial-crisis low-rate era — a classic signal that markets are pricing in a fiscal risk premium rather than just the Fed's rate cycle.

Debt Holder Structure

Federal Reserve
11.9%
1 wk
↑ +0.3%
1 mo
↑ +0.3%
1 yr
↓ -0.5%
Foreign & International
23.8%
1 wk
↓ -0.1%
1 mo
↓ -0.1%
1 yr
↓ -1.0%
Domestic Private
45.0%
1 wk
↑ +0.2%
1 mo
↑ +0.2%
1 yr
↑ +2.1%
Intragovernmental
19.3%
1 wk
↓ -0.4%
1 mo
↓ -0.4%
1 yr
↓ -0.6%

Source: Treasury Bulletin, via FRED

Notes
What is happening
Per Treasury Bulletin data (via FRED, series FDHBFRBN/FDHBFIN/FDHBPIN/FDHBATN), the Fed's share of gross federal debt fell from 20.4% (Q4 2021) to 11.9% (Q2 2026) as quantitative tightening ran, while the foreign & international share — largely central banks and official reserves — stayed broadly stable, edging down from 25.7% to 23.9% (Q1 2026, the latest quarter published). Over the same period, the domestic private-investor share rose from 32.4% to 45.0%.
Why it matters
The holder mix determines how sensitive the bond market is to fiscal risk: "captive" holders (the central bank, official foreign reserves) buy for monetary or exchange-rate reasons, largely regardless of price, whereas private investors demand a yield that compensates them for risk. The more debt migrates to the latter, the more exposed the government is to an abrupt tightening in financing conditions.
What's driving it
Central banks and foreign officials retreat, so money funds, banks and households take up the issuance, at a price.
What to watch
Level to watch: the Fed ended quantitative tightening in December 2025, which should stabilize its share. The question therefore shifts to whether private investors can absorb future net issuance without demanding extra compensation — precisely the channel through which this criterion feeds the term premium shown above.

Inflation Expectations (10-Year Breakeven)

10-Year Breakeven Inflation Rate
2.35%
1 wk
↑ +0.02%
1 mo
↑ +0.02%
1 yr
↑ +0.07%

Source: US Treasury / FRED

Notes
What is happening
The 10-year breakeven (FRED series T10YIE, the gap between the nominal 10-year yield and the 10-year TIPS yield) stood at 2.33% on October 9, 2026, essentially unchanged from 2.34% on September 21 and 2.32% in late August, despite the Fed's 16 September hike, a 10-year above 5.2% and CPI at 3.4% — modestly above the Fed's 2% target, but still within a range generally considered consistent with anchored expectations.
Why it matters
The 10-year breakeven inflation rate captures what the bond market expects average inflation to run at over the next decade. In a fiscal dominance scenario, a sustained rise in this measure would signal investors doubting the central bank's ability — or willingness — to hold its inflation target against debt pressure, rather than just a cyclical price swing.
What's driving it
Four years above target, tariffs in goods prices and a Fed that only resumed hiking in September 2026, against 3.4% inflation, keep expectations anchored above 2%.
What to watch
Level to watch: a sustained break above 2.5% would be the most direct market signal of eroding confidence in Fed independence or in its ability to contain inflation without triggering a debt-financing crisis — the clearest market symptom of fiscal dominance actually arriving rather than just building.

Methodology

  1. 1Sources

    FRED (10-year yield, TIPS breakeven), Treasury (debt to the penny), BEA (revenue, spending, interest), NY Fed (ACM term premium).

  2. 2Normalisation

    Each series in its own unit — % of GDP, % of revenue, percentage points. Quarterly inputs carried forward on the daily calendar.

  3. 3Z-scores

    Each constituent minus its mean since 2003, divided by its standard deviation; capped at ±3.

  4. 4Weighting

    Six constituents, equal weights, all oriented so that higher means more fiscal dominance.

  5. 5Index

    Average of the six z-scores × 20 points, rebased to 100 on 2 January 2003. Updated daily.

  6. 6Interpretation

    100 = the 2003 average; +20 = one standard deviation above. The breakdown shows which constituent drives the reading.

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