Space key and tab key intercepted with dark blue outline
Besides the title, its easier to see than explain. Here's a short clip: https://www.loom.com/share/7835d9685efd48178f187b8552ab7d2f
iMac 27″, macOS 12.7
It looks like Full Keyboard Access is turned on. Go to System Preferences, click Accessibility, click Keyboard, then click Navigation and turn off Full Keyboard Access.