Wall Street institutions warn: The Federal Reserve has committed "original sin," and the 10-year U.S. Treasury yield may be heading toward 8%.

Title context: Wall Street institutions warn: The Federal Reserve has committed "original sin," and the 10-year U.S. Treasury yield may be heading toward 8%. Text: As the global bond market storm intensifies, TS Lombard chief U.S. economist Steven Blitz issued a warning that the Federal Reserve is repeating the mistakes of history by easing monetary policy prematurely before inflation has been thoroughly suppressed, and this "original sin" will ultimately push the 10-year U.S. Treasury yield to 8% in the years ahead. The 10-year U.S. Treasury yield rose to 5.30% on Wednesday, the highest since 2002, and most Wall Street institutions are discussing whether 6% is the next threshold. But Blitz argues in his latest report, "Original Sin Repeated," that this judgment is "too small 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 end the "buy the dip" mindset that investors have formed 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 ecosystem determines that this situation will be difficult to reverse in the short term. Blitz explicitly stated that it may not be until 2029 at the earliest that genuine political will to suppress inflation emerges in the United States, "but I would not bet on it." "Original Sin": Premature Easing, History Repeating Blitz defines the "original sin" of monetary policy as easing ahead of time 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 Federal Reserve Chair Powell. At the end of last year, faced with a cooling job market but recovering corporate profits, Powell chose to cut ratesBlitz points out that this decision also happened to occur two months before the 2024 presidential election, objectively handing a political gift to the Biden administration at the time. Blitz acknowledges that Powell came under "enormous pressure" from the government and from multiple people 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 in a new upcycle. At the September policy meeting, Warsh "resisted somewhat" with a 25-basis-point hike, raising the federal funds rate to the 3.75%-4.00% range, with the vote passing unanimously. Blitz's reaction to this was: "Why not raise by 50 basis points?" "The Recession That Did Not Happen": Fiscal Expansion Interrupted the Adjustment Blitz characterizes 2025 as "the recession that did not happen." After the yield curve was inverted for about 22 months, private nonfarm payrolls excluding health care were already declining, and real economic growth should have contracted, but that scenario never materialized. The reason lies in two factors: first, the scale of fiscal expansion was too large; second, the Federal Reserve began cutting rates just as corporate profits were recovering. Tariff policy also added fuel to the fire. Blitz cites two classic Wall Street rules: first, corporate profits lead employment, and employment leads inflation; second, the mildest inflation year is often the first year of recovery. This means 2026 is a "good year," and under the impact of tariffs and oil prices, underlying inflation has actually declined somewhat. But from now on, if the stock market remains cooperative, elevated corporate profits will drive faster hiring, thereby pushing up underlying inflation in 2027. He also points out that the August core PCE data released this week appeared "below expectations" only because the actual reading of 0.247% was rounded to 0.2%, and benchmark revisions artificially depressed the entire series. At the same time, supercore inflation rose 0.4% month over month, the "other services" component posted the largest increase on record, and education costs also climbed by a record amount. The 10-year U.S. Treasury yield then erased all of its gains after 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 deeper DRIVE behind 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 a floating overnight secured rate 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 spread globallyU.K. and French swap spreads narrowed sharply, and Germany's situation also moved 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 usually 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%: Policy Mix and Political Logic Blitz's core conclusion is that the policy combination of loose money and expansionary fiscal policy will push up the floor for inflation and yields in every cycle, until there is genuine political will willing to suppress inflation at the cost of short-term growth. He summarizes this divide as "Hamilton versus Jackson"the former representing the path of running the economy through the central bank, the latter representing the path of relying on government policy. And "the populism that will elect the next president leans toward Jackson." He sums up the past decade of U.S. 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, the rise in yields has been driven mainly by real rates, which suppresses the stock market while avoiding a sell-off in the dollar. But if the DRIVE shifts to an inflation-expectations premium, "stocks will perform reasonably well, and dollar bears will have their day," at which point "the great dollar bear market everyone has long expected will truly begin." The decisive variable is that the U.S. net savings rate has fallen to zero, with "no sign of improvement." It is against this backdrop that Blitz gives his judgment: "Ultimately, we will see the 10-year U.S. Treasury yield reach 8%." What Will "Break" First Blitz does not predict the collapse of a specific asset. What he expects to break is a mindsetthe market's "firm belief" in inflation returning to 2%, and the reflexive logic that "being long stocks and bonds will always pay off." For a generation of investors who have experienced 40 years of falling 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 Goldman Sachs' delta hedging business, said this week that the path of interest rates "has become severe enough that it cannot be ignored," even though "the stock market has shown impressive resilience." In addition, the U.S. Treasury is not without influence over the path of yields. 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 higher again," and that buyback operations "interrupt this loop, but may not break it." Blitz's judgment is this: a government that refuses to accept recession cannot choose its own ceiling on yields. This article is reprinted from "Wall Street See", author: Zhao Ying; GMTEight editor: Zheng Yuyang.