Fed’s ‘Original Sin’ to Push 10-Year Treasury Yield to 8%, Warns Top Economist
TREE NEWS reports: The 10-year U.S. Treasury yield surged to 5.30% on Wednesday, its highest level since 2002, as a global bond selloff intensifies. While most Wall Street institutions debate whether 6% is the next threshold, Steven Blitz, chief U.S. economist at TS Lombard, argues that such forecasts are far too modest. In a new report titled “Original Sin Repeats,” Blitz contends that 5.75% is merely the next waypoint, and that 8% is the long-term target—a level that would materially suppress equity markets and end the decades-old investor mantra of “buy the dip.”
The ‘Original Sin’: Premature Easing, History Repeats
Blitz defines the monetary policy “original sin” as easing prematurely before an economic downturn has sufficiently vanquished inflation—”taking a second bite of the same apple.” In his narrative, the culprit this time is former Fed Chair Jerome Powell. Late last year, with the job market cooling but corporate profits rebounding, Powell chose to cut rates—a decision that Blitz notes conveniently occurred two months before the 2024 presidential election, delivering a political gift to the Biden administration. Blitz acknowledges Powell faced “enormous pressure” from the government and multiple aspirants to his position, including some FOMC members who wanted him to “close his eyes and ease more.”
Now, Trump, Treasury Secretary Bessent, and economic adviser Kevin Hassett, among others, hope that incoming Fed Chair Kevin Warsh will similarly “look the other way” and execute loose policy in the next upcycle. Warsh offered some resistance at the September FOMC meeting by raising rates 25 basis points to a 3.75%-4.00% range, with a unanimous vote. Blitz’s reaction: “Why not 50 basis points?”
The ‘Recession That Never Happened’: Fiscal Expansion Interrupts Adjustment
Blitz characterizes 2025 as “the recession that never happened.” After the yield curve was inverted for roughly 22 months, private nonfarm payrolls excluding healthcare were already declining, and real economic growth should have contracted—but it never materialized. The reasons: fiscal expansion was too large, and the Fed began cutting rates just as corporate profits were recovering. Tariff policy also played a role.
Blitz cites two classic Wall Street rules: corporate profits lead employment, which leads inflation; and the mildest inflation year is often the first year of recovery. This implies 2026 will be a “good year,” with underlying inflation actually declining amid tariff and oil price shocks. But from now on, if the stock market cooperates, elevated corporate profits will drive faster hiring, pushing underlying inflation higher in 2027.
He also notes that this week’s August core PCE data appeared “below expectations” only because the actual 0.247% reading rounded to 0.2%, and benchmark revisions artificially depressed the entire series. Meanwhile, supercore inflation rose 0.4% month-over-month, the “other services” component posted its largest increase on record, and education costs climbed to a record. The 10-year Treasury yield promptly erased all its post-PCE gains.
Swap Spreads: Market Pricing Fiscal Risk
The most unique part of Blitz’s analysis is his interpretation of swap spreads. He argues the deep driver of rising yields is “excess sovereign debt supply”—developed market governments need to roll over debt, fiscal deficits are expanding faster than nominal GDP, and central banks are no longer marginal buyers.
The most direct signal comes from swap spreads: investors increasingly prefer receiving floating overnight secured rates over 10-year horizons rather than holding fixed-coupon sovereign bonds. This trend has existed in the U.S. since 2012 but has spread globally post-COVID—U.K. and French swap spreads have narrowed sharply, and Germany’s situation is trending toward equilibrium.
Blitz emphasizes 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 ECB, yet their swap spreads have diverged. The market is pricing fiscal risk, not policy rates or inflation paths. His model for U.S. 10-year swap spreads shows that even after stripping out curve shape and bank balance sheet regulatory constraints, market preference for U.S. Treasuries continues to decline year by year.
Why 8%: Policy Mix and Political Logic
Blitz’s core conclusion: the policy mix of loose money and expansionary fiscal policy will push the floor of inflation and yields higher in every cycle, until there is genuine political will to suppress inflation at the cost of short-term growth. He frames this divide as “Hamilton versus Jackson”—the former representing running the economy through a central bank, the latter relying on government policy. And “the populism that will elect the next president leans Jacksonian.” He sums up the past decade of U.S. politics in one sentence: “People are socially conservative and fiscally liberal.”
The nature of rising yields is equally critical. Blitz notes that so far, yield increases have been driven mainly by real rates, which suppresses stocks while avoiding a dollar selloff. But if the driver shifts to an inflation expectations premium, “stocks will perform okay, and dollar bears will have their day,” at which point “the long-awaited dollar bear market will truly begin.”
The decisive variable is that the U.S. net savings rate has fallen to zero, with “no sign of improvement.” Against this backdrop, Blitz delivers his judgment: “Ultimately, we will see the 10-year Treasury yield reach 8%.”
What Breaks First
Blitz does not predict a specific asset crash. What he expects to break is a mindset—the market’s “firm belief” in inflation returning to 2%, and the reflexive logic that “being long stocks and bonds always pays.” For a generation of investors who experienced 40 years of falling rates and grew accustomed to buying the dip, this will be a major cognitive adjustment.
Notably, Blitz is not alone. Rich Privorostsky, head of delta hedging at Goldman Sachs, said this week that rate moves are “severe enough to no longer be ignored,” despite “impressively resilient equity markets.”
Moreover, the U.S. Treasury is not without influence over yield movements. Rabobank previously called the Treasury’s expanded August buyback program a “light version of yield curve control,” warning that “higher yields worsen the fiscal outlook, which pushes up term premiums, which pushes yields even higher,” and that buybacks “interrupt this loop but may not break it.”
Blitz’s judgment: a government that refuses to accept recession cannot independently choose its yield ceiling.
Key Takeaways for Investors
- Prepare for structurally higher rates: The era of ultra-low yields is over. Portfolios should be stress-tested for a sustained rise in long-term borrowing costs, with implications for equity valuations, bond duration, and real estate.
- Diversify beyond traditional stocks and bonds: If the “buy the dip” reflex fails, alternative assets—including commodities, inflation-linked bonds, and select digital assets—may offer better inflation protection.
- Watch swap spreads and fiscal policy: These are now more informative than traditional policy rate signals. Widening swap spreads indicate rising sovereign risk premiums.
- Currency risk is back: A shift from real-rate-driven to inflation-expectation-driven yield increases could trigger a significant dollar bear market, affecting global portfolios.
