>> more fat is deposited within the muscle

Possibly related: Gerald Shulman has done some fMRI work showing that insulin resistance comes from fat buildup in the skeletal (striated) muscles. Triglycerides aren't a problem (athletes often have fat in their muscles) but some people end up with diglycerides (same backbone as trigs but with one FA removed), and of those, there is at least one configuration (different FAs have different shapes) that can block the cascade that starts with insulin at the cell wall and ends with the GLUT3 receptor (like a little straw) poking through that wall (simple diffusion, not a pump). An alternate way to get that 'straw' poking up is exercise - at least in the short term. Shulman posits that long term exercise can reverse the issue, but no data.

OK, that's known. Now I'm guessing.

I would guess that what's going on starts with insulin resistance. Muscles won't uptake glucose. Beta cells produce more insulin. Fat calls respond to insulin as well, so higher insulin levels mean fat cells sucking up glucose, turning it into triglycerides, storing it. So glucose levels stay within 'normal' range (good!) but instead of being turned into glycogen in the muscles, it's trigs in fat cells (via DNLG). Add in sedentary behavior (no exercise) and we have muscles getting insufficient glucose and fat cells expanding/proliferating. Just a thought - but I'd be curious to see correlation of sarcopenia and T2DM. If it's inverted, I'm wrong here.

As a side note, I'd mention that there have been a couple of studies showing that creatine monohydrate can slow sarcopenia. As I remember, those were in the range of 1g/day, so a good bit lower than the weightroom guys are using to bulk up. No data on whether it could help reverse the issue.