Exorbitant Privilege and the Long-End Test

05/09/25

Exorbitant Privilege sounds like the most wonderful ice cream flavour, but the phrase, coined by French finance minister Valéry Giscard d’Estaing, describes America’s ability to run persistent deficits while still borrowing cheaply in global markets. For decades, this privilege has rested on the dollar’s dominance and the world’s willingness to keep holding U.S. debt.

The question now is whether that cone can continue to hold the frosted confection over the next 6 to 12 months. At a time when many assumptions of late-20th and early-21st century economics are being tested, the durability of America’s privilege may come down to the bond market in the era of Trump’s second term.

In the U.S., payrolls have tilted expectations toward a September cut. Markets price a high probability of 25 basis points on September 17, with the funds target range at 4.25 to 4.50 percent. Inflation remains sticky, with headline CPI at 2.7 percent year on year, core CPI at 3.1 percent, and core PCE at 2.9 percent. Manufacturing shows weakness, with the August ISM PMI at 48.7, new orders barely in expansion at 51.4, and production at 47.8. 

The real tension lies in the long bond. The Fed can anchor the short end, but credibility is measured further out. If the long end refuses to rally, financial conditions will not ease, no matter what happens with Fed Funds.

That tension is amplified by the volume of debt still to be refinanced. From September onward, roughly 7.6 trillion dollars of Treasuries, close to one third of the total stock, must be rolled over within the coming 12 months. When new borrowing to cover the federal deficit is added, total financing needs rise toward 10 trillion dollars over the same period. The heaviest wave of maturities passed during the summer of 2025, but rollover pressure has not gone away. Between now and next August, refinancing needs remain elevated, with about 3 trillion scheduled in the rest of 2025 and a further 4.6 trillion in the first eight months of 2026. These refinancing waves are the practical test of privilege, where the willingness of buyers at the long end will determine whether financial conditions loosen or remain tight. 

 Sources: Apollo Global Management (Torsten Slok), MUFG Americas, Wolf Street analysis of Treasury maturity schedules.

Sources: Apollo Global Management (Torsten Slok), MUFG Americas, Wolf Street analysis of Treasury maturity schedules. 

The U.K. highlights the risk. Thirty-year gilt yields touched 5.75 percent in early September, the highest since 1998. Services are resilient, with the composite PMI at 53.0 and services at 54.2, but manufacturing remains in contraction at 47.3. Inflation is 3.8 percent, and the Bank of England meets on September 18, November 6, and December 18. The Autumn Budget arrives on November 26, with issuance already tilting shorter despite the U.K.’s traditionally long maturity profile.

The euro area shows only modest relief. Inflation nudged higher to 2.1 percent in August, with manufacturing back in slight expansion at 50.7. Germany remains weak, services at 49.3 and unadjusted unemployment over 3 million, though the adjusted jobless rate held at 6.3 percent.

China offers a mirror of fragility. H1 GDP grew about 5.3 percent. July activity was positive, with industrial output up 5.7 percent and retail sales up 3.7 percent, but property remains a drag. Official August PMIs were 49.4 for manufacturing, 50.3 for non-manufacturing, and 50.5 for composite. Even in services, where the private survey reached 53.0, momentum looks modest.

Taken together, the world leans on U.S. monetary policy while questioning its fiscal base. The Fed can cut in September, but unless the long bond bends, conditions may not loosen. That is the essence of the cone test: does the privilege hold, or does the world get very sticky hands?

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