Cook macaroni according to package directions; drain.
In large saucepan, melt butter. Add onion; sauté until translucent. Blend in flour, dry mustard, cayenne and pepper. Add milk; cook over medium heat, stirring constantly, until mixture thickens and boils for 2 minutes. Stir in 1 1/4 pounds Sharp Cheddar Cheese; continue cooking, stirring constantly, until cheese melts.
Add cooked macaroni; mix well. Turn into greased 10x12x2-inch hotel pan.
Bake in 350°F oven for 30 minutes. Top with remaining 4 ounces of cheese; bake for an additional 10 to 15 minutes until heated through and cheese is melted.