Citadel Securities: Fed's "standstill" raises concerns, long-term US Treasury yields near 20-year highs increase market risks

According to reports from Zhihui Caijing APP, Citadel Securities believes that the Federal Reserve’s continued reluctance to further tighten monetary policy, even as inflation remains well above target for an extended period, is causing long-term U.S. Treasury yields to stay at multi-year highs and may continue to pose risks to broader financial markets.

Nohshad Shah, Citadel Securities’ Head of EMEA Fixed Income Sales, pointed out in the latest client report that although the Federal Reserve’s policy rate has fallen 175 basis points from its previous peak, long-term U.S. Treasury yields remain near their highest levels in almost 20 years. This divergence reflects waning market confidence in the ability of monetary and fiscal policymakers to navigate these challenges.

Shah stated that in his view, the current market believes that both the Federal Reserve and the fiscal authorities tend to choose a relatively accommodative path when faced with difficult policy decisions. As long as this perception persists, it could remain a key risk facing financial markets.

On Monday, the yield on 30-year U.S. Treasuries rose to its highest level in 19 years, at one point exceeding 5.28%. Despite last week’s data showing signs of cooling U.S. inflation and consumer demand, long-term Treasury yields remain elevated, indicating that investors still demand higher returns to hold long-term bonds.

Shah warned that the market should not assume that interest rate risks have been fully eliminated just because of recent improvements in inflation and a weakening labor market. He pointed out that currently, over 55% of core goods prices are still rising, showing that underlying price pressures have not fully faded. Against this backdrop, the Federal Reserve’s policy meeting next month will face very difficult choices, and there remains significant uncertainty over whether further rate adjustments are needed.

Recent U.S. economic data has sent mixed signals. On one hand, inflation, consumer demand, and the job market have shown signs of cooling; on the other, price pressures remain clearly above the Federal Reserve’s target. This has led markets to continuously evaluate whether the Fed needs to tighten policy further and whether policymakers’ tolerance for prolonged high inflation might drive long-term rates even higher.

Beyond the rates market, Shah also discussed the changing investment logic in artificial intelligence. He believes that as competition in the AI industry enters its next phase, investment opportunities may gradually shift from developing ever-more advanced frontier AI models toward cloud computing and infrastructure that support AI operations.

In his view, hyperscale cloud companies such as Microsoft (MSFT.US) and Google may have a clearer path to monetizing AI. These firms can generate revenue by providing computing power, AI inference services, and massive product and customer distribution channels, offering greater visibility on investment returns compared to frontier model developers like OpenAI and Anthropic.

This means that after the intense competition around large model capabilities and training investment, the main line of AI investing may further tilt toward platform companies with computing infrastructure and commercialization channels. Citadel Securities believes that the ability to convert massive AI capital investments into stable revenues and returns will be a key factor in the next stage of evaluating the value of AI investments.