Citadel Securities has shifted its view on long-term U.S. government bonds, having previously warned of a downtrend last month. Now, it assesses that risks are tilting toward a recovery in bond prices, with long-term yields likely to decline, as investors have accumulated excessive bearish positions and inflation data begins to show improvement. Frank Flight, head of macro strategy at Citadel Securities, said in a report on Tuesday that the firm now sees market odds leaning toward lower long-term bond yields, a reversal from the previous month when he warned investors to brace for a difficult period in the U.S. bond market. Long-term U.S. government bonds have faced heavy selling in recent weeks due to concerns over inflation, budget deficits, and a large volume of debt issuance, particularly from tech companies raising funds for AI infrastructure investments. This selling pushed the 30-year U.S. Treasury yield to its highest level in nearly 20 years last week, before Treasury Secretary Scott Bessent announced plans to increase buybacks of 10- to 30-year bonds to help ease market pressure. One key reason for Citadel's change in outlook comes from trend-following investment strategy models, such as Commodity Trading Advisors (CTAs), which found that bearish positions on long-term bonds are relatively stretched compared to historical norms. Flight believes this means that if bond prices fall further, there may be limited additional selling, as many investors have already established short positions. Conversely, if bond prices can recover sustainably, short sellers may need to buy back bonds to cover positions, potentially fueling further price gains and pushing yields down. This latest view marks a clear reversal for Flight, who in early July warned that bond market investors were underestimating the commitment of Federal Reserve Chairman Kevin Warsh to fight inflation. At that time, Flight even predicted the Fed might surprise by raising interest rates at its July 29 meeting, contrary to most economists who expected rates to remain unchanged. Ultimately, the Fed held rates steady, but Warsh's post-meeting statements raised questions in the market about the strictness of inflation control and contributed to the sell-off in long-term bonds. However, Flight now believes concerns about the Fed's credibility may be overblown, as recent economic data, including softer employment and inflation figures, are beginning to support a more accommodative monetary policy approach. Another factor supporting the positive view is Citadel Securities' cross-asset model, which examines historical episodes with similar growth and monetary policy signals. Out of 64 episodes since 2003, bond yields declined over the following 120 days in 71% of cases, with an average decrease of about 0.25 percentage points. Flight therefore assesses that after the heavy sell-off in long-term bonds, the risk-reward is now shifting toward a recovery in bond prices and lower yields.
Citadel sees long-term yields falling, implying lower 10Y yield.
Citadel sees long-term yields falling, implying lower 30Y yield.
Citadel's own bullish outlook on bonds is a positive for its trading strategy.
