Wall Street firms warn: The Federal Reserve has committed an "original sin," and the 10-year US Treasury yield may be heading towards 8%.

As the global bond market turmoil intensifies, Steven Blitz, chief U.S. economist at TS Lombard, warned that the Federal Reserve is repeating its historical mistake of prematurely easing monetary policy before inflation has been fully suppressed. This "original sin" will push the 10-year U.S. Treasury yield to eventually reach 8% in the coming years.

The yield on 10-year U.S. Treasury bonds rose to 5.30% on Wednesday, a new high since 2002, and most Wall Street institutions are discussing whether 6% is the next threshold. However, Blitz, in its latest report "Original Sin Repeats Itself," argues that this judgment is "too narrow-minded"—5.75% is merely the next temporary plateau, while 8% is the long-term target, which will exert substantial downward pressure on the stock market and end the decades-old "buy on dips" mentality among investors.

The core logic behind this assessment is that the combination of loose fiscal and monetary policies will push up the central level of inflation and yields in each economic cycle, and the US political landscape makes this situation difficult to reverse in the short term. Blitz explicitly stated that the earliest the US might have the political will to truly suppress inflation is 2029, "but I won't bet on that."

"Original Sin": Relaxing too early, history repeating itself.

Blitz defines the "original sin" of monetary policy as: prematurely easing monetary policy before the economic downturn has fully eliminated inflation, "like taking another bite out of the same apple."

In his account, the "culprit" this time is former Federal Reserve Chairman Jerome Powell. Late last year, facing a cooling job market but recovering corporate profits, Powell opted for an interest rate cut—a decision Blitz points out, occurring just two months before the 2024 presidential election, effectively handing a political gift to the then-Biden administration. Blitz acknowledges that Powell faced "enormous pressure" from the government and several potential candidates for his position, including some members of the Federal Open Market Committee (FOMC), who wanted him to "close his eyes and relax more."

Now, Trump, Treasury Secretary Bessent, and economic advisor Bessent, among others, hope that new Federal Reserve Chairman Warsh will "turn a blind eye" to the loose monetary policy in the new upward cycle. Warsh "somewhat resisted" a 25-basis-point rate hike at the September policy meeting, raising the federal funds rate to a range of 3.75%-4.00%, which was unanimously approved. Blitz's reaction was: "Why not 50 basis points?"

"A recession that didn't happen": Fiscal expansion interrupted the adjustment.

Blitz characterizes 2025 as a "recession that never happened." After the yield curve has been inverted for about 22 months, private nonfarm payrolls excluding the healthcare sector have been declining, and real economic growth should have contracted, but this has never materialized.

The reasons are twofold: first, the scale of fiscal expansion was excessive; and second, the Federal Reserve began cutting interest rates just as corporate profits were beginning to recover. Tariff policies also played a role in exacerbating the situation.

Blitz cites two classic Wall Street rules: first, corporate profits lead employment, and employment leads inflation; second, the year with the most moderate inflation is often the first year of a recovery. This means 2026 will be a "good year," with underlying inflation actually declining due to tariffs and oil price shocks. However, from now on, if the stock market cooperates, high corporate profits will drive faster hiring, thus pushing up underlying inflation in 2027.

He also pointed out that the August core PCE data released this week appeared to be "below expectations," only because the actual reading of 0.247% was rounded to 0.2%, and the benchmark revision artificially suppressed the entire series. Meanwhile, supercore inflation rose 0.4% month-over-month, with the "other services" sub-index seeing its largest increase on record, and education costs also climbing to a record high. The 10-year Treasury yield subsequently erased all gains made after the PCE data release.

Swap Spreads: The Market Is Pricing Fiscal Risk

The most unique part of Blitz's analysis is his interpretation of swap spreads. He argues that the underlying driver of rising yields is "oversupply of sovereign debt"—developed market government debt needs to be rolled over, while fiscal deficits are expanding faster than nominal GDP growth, and central banks are no longer acting as marginal buyers.

The most direct signal comes from swap spreads: investors are increasingly opting for floating overnight secured rates over 10 years rather than holding fixed-coupon sovereign bonds. This trend has existed in the US since 2012, but has spread globally since the COVID-19 pandemic—swap spreads have narrowed significantly in the UK and France, and the situation in Germany has become more balanced.

Blitz emphasized that this is "a matter of risk appetite, not a curve problem." France and Germany share the same central bank, and the Bank of England typically follows the European Central Bank, yet their swap spreads have diverged. The market is pricing in fiscal risk, not policy rates or the inflation path.

He developed a model for the US 10-year swap spread, and the results showed that even after removing the effects of yield curve shape and bank balance sheet regulatory constraints, market preference for US Treasuries continued to decline year by year.

Why 8%?: Policy Mix and Political Logic

Blitz's core conclusion is that the policy combination of loose monetary policy and expansionary fiscal policy will push up the bottom of inflation and yields in each cycle until there is a genuine political will willing to suppress inflation at the expense of short-term growth.

He summarized this divergence as a "Hamilton vs. Jackson" confrontation—the former representing a path of operating the economy through central bank policies, and the latter representing a path reliant on government policy. He added that "the populism that will elect the next president leans towards Jackson." He summarized the past decade of American politics in one sentence: "People are conservative on social issues, liberal on fiscal issues."

The nature of the rising yields is equally crucial. Blitz points out that so far, the rise in yields has been primarily driven by real interest rates, which has suppressed the stock market while preventing a sell-off in the dollar. However, if the driving force shifts to the inflation expectation premium, "the stock market will perform reasonably well, and the dollar bears will have their time," at which point "the long-awaited dollar bear market will truly begin."

The decisive variable is that the US net savings rate has fallen to zero and "shows no signs of improvement." It is against this backdrop that Blitz offered his prediction: "Ultimately, we will see the 10-year US Treasury yield reach 8%."

What will "collapse" first?

Blitz did not predict the collapse of any specific asset. What he anticipated breaking was a mindset—the market's "unwavering belief" in a return to 2% inflation, and the reflexive logic that "going long on stocks and bonds will always pay off." For a generation of investors accustomed to 40 years of declining interest rates and the habit of buying on dips, this would be a major cognitive shift.

It's worth noting that Blitz is not an isolated case. According to reports, Rich Privorostsky, head of Goldman Sachs' delta hedging business, said this week that interest rate movements "have become too harsh to ignore," despite "the stock market showing impressive resilience."

Furthermore, the U.S. Treasury is not without influence over yield curve movements. Rabobank previously referred to the Treasury's expanded Treasury repurchase program in August as a "lightweight yield curve control," warning that "higher yields worsen the fiscal outlook, which in turn pushes up term premiums, which in turn pushes up yields again." The repurchase operation "interrupted this cycle, but it may not break it."

Blitz's assessment is that a government that refuses to accept recession cannot independently choose the upper limit of yield.

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