Why Can't U.S. Bond Yields Come Down? Citadel Securities Points to Fed's Unwillingness to Tighten Policy

Citadel Securities stated that the Federal Reserve's (Fed) unwillingness to further tighten monetary policy despite inflation remaining above target for an extended period has kept long-term U.S. Treasury yields at multi-year highs, posing broader risks to the overall financial market.

Nohshad Shah, Head of Fixed Income Sales for Europe, Middle East, and Africa at Citadel Securities, noted in a client report that although the Fed's policy rate is 175 basis points below its peak, long-term U.S. Treasury yields remain at their highest level in nearly two decades.

Shah believes this reflects market perception that the Fed and fiscal authorities tend to choose the easier path when faced with difficult decisions. As long as this view persists, high yields will remain a risk across various markets.

The yield on the U.S. 30-year Treasury bond surpassed 5.28% on Monday, hitting a 19-year high. Last week's data showed cooling inflation and consumer demand, yet bond markets reduced expectations for a Fed rate cut in September, indicating investors remain cautious about long-term price stability and policy credibility.

Shah warned that recent improvements in inflation and a weakening labor market should not lead to the conclusion that rate risks have dissipated. Over 55% of core goods prices are still rising, making the Fed's policy decision next month a closely contested one.

Regarding the artificial intelligence (AI) race, Shah believes investment focus is shifting from developing more advanced large models to cloud infrastructure. Hyperscale cloud providers such as Microsoft (MSFT-US) and Google's parent Alphabet (GOOGL-US) can generate revenue through computing capacity, AI inference, and product distribution, offering clearer investment returns compared to frontier model developers like OpenAI and Anthropic.