As the global bond market storm intensifies, Steven Blitz, Chief U.S. Economist at TS Lombard, has issued a warning that the Federal Reserve is repeating a historical mistake by easing monetary policy prematurely before inflation is fully suppressed, and this "original sin" will ultimately push the 10-year Treasury yield to 8% over the coming years.
The 10-year Treasury yield rose to 5.30% on Wednesday, marking a new high since 2002, and most Wall Street institutions are debating whether 6% is the next threshold. However, in his latest report titled "Original Sin Revisited," Blitz argues that such a judgment is "too narrow in scope" — 5.75% is merely the next interim plateau, while 8% is the long-term target, at which point it will exert substantial pressure on the stock market and put an end to the "buy the dip" mindset that investors have developed over decades.
The core logic behind this judgment is that the policy combination of loose fiscal policy and loose monetary policy will push up the central tendency of inflation and yields in every economic cycle, and the U.S. political landscape determines that this situation is difficult to reverse in the short term. Blitz explicitly stated that it will not be until 2029 at the earliest that the United States might develop genuine political will to suppress inflation, "but I would not bet on that."
"Original Sin": Premature Easing, History Repeating
Blitz defines the "original sin" of monetary policy as easing prematurely before an economic downturn has sufficiently eliminated inflation — "like taking another bite of the same apple."
In his narrative, the "perpetrator" this time is former Fed Chair Powell. At the end of last year, facing a cooling job market but recovering corporate profits, Powell chose to cut rates — Blitz points out that this decision conveniently occurred just two months before the 2024 presidential election, objectively delivering a political gift to the Biden administration at the time. Blitz acknowledges that Powell was under "enormous pressure" from the government and several individuals coveting his position, including some Federal Open Market Committee (FOMC) members who wanted Powell to "close his eyes and ease more."
Now, Trump, Treasury Secretary Bessent, and economic adviser Bessent, among others, want the new Fed Chair Warsh to "turn a blind eye" and implement loose policy during a new upcycle. Warsh "put up some resistance" at the September FOMC meeting by supporting a 25-basis-point rate hike, bringing the federal funds rate to a range of 3.75%-4.00%, with a unanimous vote. Blitz's reaction to this was: "Why not 50 basis points?"
"The Recession That Never Happened": Fiscal Expansion Interrupted the Adjustment
Blitz characterizes 2025 as "the recession that never happened." After the yield curve was inverted for approximately 22 months, private nonfarm payrolls excluding healthcare were already declining, and real economic growth should have contracted, but this scenario never materialized.
The reason lies in two factors: first, the scale of fiscal expansion was too large; second, the Fed began cutting rates just as corporate profits were recovering. Tariff policy also played a contributing role.
Blitz cites two classic Wall Street rules: first, corporate profits lead employment, and employment leads inflation; second, the year with the mildest inflation is often the first year of recovery. This means 2026 will be a "good year," with underlying inflation actually declining somewhat under the impact of tariffs and oil prices. But from now on, if the stock market cooperates, elevated corporate profits will drive faster hiring, which in turn will push up underlying inflation in 2027.
He also points out that this week's August core PCE data appeared to be "below expectations" only because the actual reading of 0.247% was rounded down to 0.2%, and benchmark revisions artificially depressed the entire series. Meanwhile, super core inflation rose 0.4% month-over-month, the "other services" component posted the largest increase on record, and education costs also climbed to a record high. The 10-year Treasury yield immediately erased all of its gains following the PCE data release.
Swap Spreads: The Market Is Pricing Fiscal Risk
The most distinctive part of Blitz's analysis is his interpretation of swap spreads. He believes the deep-seated driver of rising yields is "excess supply of sovereign debt" — developed market government debt needs to be rolled over, 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 inclined to receive floating overnight secured rates over a 10-year horizon rather than hold fixed-coupon sovereign bonds. This trend has existed in the United States since 2012, but after the COVID-19 pandemic it has spread globally — UK and French swap spreads have narrowed significantly, and Germany's situation is also trending toward equilibrium.
Blitz emphasizes that this is "a risk appetite issue, not a curve issue." France and Germany share the same central bank, and the Bank of England typically follows the European Central Bank, yet the swap spread trajectories of the two countries have diverged. What the market is pricing is fiscal risk, not the policy rate or the inflation path.
He built a model for the U.S. 10-year swap spread, and the results show that even after stripping out the effects of the yield curve shape and bank balance sheet regulatory constraints, the market's preference for U.S. Treasuries is still declining year by year.
Why 8%: The 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 floor of inflation and yields in every cycle, until there emerges genuine political will to suppress inflation at the cost of short-term growth.
He summarizes this divergence as "Hamilton versus Jackson" — the former representing the path of running the economy through a central bank, the latter representing reliance on government policy. And "the populism that will elect the next president leans toward Jackson." He summed up the past decade of American politics in one sentence: "People are conservative on social issues and liberal on fiscal issues."
The nature of rising yields is equally critical. Blitz points out that so far, rising yields have been primarily driven by real rates, which suppresses the stock market while avoiding a sell-off in the dollar. But if the driver shifts to an inflation expectation premium, "stocks will perform reasonably well, and dollar bears will have their day," at which point "the great dollar bear market that everyone has long anticipated will truly begin."
The decisive variable is that the U.S. net savings rate has fallen to zero, with "no signs of improvement." It is against this backdrop that Blitz offers his judgment: "Ultimately, we will see the 10-year Treasury yield reach 8%."
What Will "Break" First
Blitz does not predict the collapse of any specific asset. What he expects to break is a mindset — namely, the market's "firm belief" in inflation returning to 2%, and the reflexive logic that "being long stocks and bonds will always be rewarded." For a generation of investors who have experienced 40 years of declining interest rates and grown accustomed to buying the dip, this will be a major cognitive adjustment.
It is worth noting that Blitz is not alone. According to reports, Rich Privorostsky, head of delta hedging at Goldman Sachs, said this week that interest rate movements have become "so severe that they cannot be ignored," despite "impressive resilience in the stock market."
Moreover, the U.S. Treasury is not without influence over yield movements. Rabobank previously called the Treasury's expanded bond buyback program in August a "light version of yield curve control," and warned that "higher yields worsen the fiscal outlook, which in turn pushes up term premiums, which in turn pushes yields even higher," and that buyback operations "interrupt this cycle but may not break it."
Blitz's judgment is this: a government that refuses to accept a recession cannot independently choose the ceiling on yields.