TAIT bug report from tracking issue

I found what I believe is a bug, that seems to only trigger when using a closure as the associated type of a trait.
The following does not compile:

pub trait Bind {
    type Arg;
    type OutFn;

    fn bind<'a>(self, arg: Self::Arg) -> Self::OutFn
    where
        Self: 'a,
        Self::Arg: 'a,
        Self::OutFn: 'a,
        Self::Arg: Clone;
}

impl<Arg, Out> Bind for fn(Arg) -> Out {
    type Arg = Arg;
    type OutFn = impl Fn() -> Out;

    fn bind<'a>(self, arg: Self::Arg) -> Self::OutFn
    where
        Self: 'a,
        Self::OutFn: 'a,
        Self::Arg: 'a,
        Self::Arg: Clone,
    {
        move || self(arg.clone())
    }
}

The compiler produces the output:

   Compiling playground v0.0.1 (/playground)
error[E0277]: the trait bound `Arg: Clone` is not satisfied
  --> src/main.rs:28:9
   |
28 |         move || self(arg.clone())
   |         ^^^^^^^^^^^^^^^^^^^^^^^^^ the trait `Clone` is not implemented for `Arg`
   |
note: required by a bound in `<fn(Arg) -> Out as Bind>::bind`
  --> src/main.rs:26:20
   |
21 |     fn bind<'a>(self, arg: Self::Arg) -> Self::OutFn
   |        ---- required by a bound in this associated function
...
26 |         Self::Arg: Clone,
   |                    ^^^^^ required by this bound in `<fn(Arg) -> Out as Bind>::bind`
help: consider restricting type parameter `Arg` with trait `Clone`
   |
17 | impl<Arg: std::clone::Clone, Out> Bind for fn(Arg) -> Out {
   |         +++++++++++++++++++

For more information about this error, try `rustc --explain E0277`.
error: could not compile `playground` (bin "playground") due to 1 previous error

Playground link: https://play.rust-lang.org/?version=nightly&mode=debug&edition=2024&gist=3e6d260f4ed442040fabce0bdebc8e9f

Originally posted by @Houtamelo in #63063

cc @software-artificer

Start by running the linked nightly Playground example and reproduce the E0277 diagnostic shown at src/main.rs. Trace how the compiler handles the closure associated type and the Arg: Clone bound; done means the minimized example behaves as intended and the regression is covered by an appropriate compiler test.