Citadel Securities says Fed policy risk is keeping Treasury yields elevated

The Federal Reserve’s reluctance to tighten policy after an extended period of above-target inflation is keeping long-term bond yields near multiyear highs and creating broader market risk, according to Citadel Securities.

Long-dated Treasury yields remain near their highest levels in almost two decades even though policy rates are 175 basis points below their peak, Nohshad Shah, Citadel’s head of EMEA fixed-income sales, wrote in a client note.

Shah said the pricing reflects a market view that the Fed and fiscal authorities tend to choose easier options when faced with difficult decisions. He warned that the pattern will remain a broader market risk while it persists.

The US 30-year Treasury yield climbed above 5.28% on Monday, reaching a 19-year high as traders reduced expectations for a September rate cut after inflation and consumer-demand data released last week.

Shah cautioned that improving inflation and a softer labor market did not provide an all-clear for rates, noting that more than 55% of core goods prices were rising. He described next month’s Fed decision as a close call.

On artificial intelligence, Shah said the investment case is shifting toward cloud infrastructure. He said hyperscalers including Microsoft and Google may have clearer paths to monetization through computing capacity, inference and distribution than frontier model developers such as OpenAI and Anthropic.