Citadel Sees Greater Scope for Long-Term US Treasury Yields to Fall as Shorts Get Crowded

Crowded bearish bets on long-dated US Treasuries, combined with softer inflation data, have increased the chances that long-term yields will decline.

Frank Pliete, Citadel Securities' head of macro strategy, wrote in a note that “the current asymmetry of risks is skewed toward lower long-end yields,” Bloomberg reported on August 25. The view marks a reversal from his call last month that US bond investors faced a difficult summer.

Long-dated US Treasuries have recently come under pressure from concerns about inflation and fiscal deficits, along with heavy bond issuance by technology companies to fund artificial intelligence infrastructure investment. The 30-year Treasury yield climbed last week to its highest level in about two decades. In response, US Treasury Secretary Scott Bessent said buybacks of Treasuries with maturities of 10 to 30 years would be expanded.

Pliete said bearish Treasury positions held by trend-following strategies such as commodity trading advisers, or CTAs, are especially stretched relative to historical norms. As a result, further declines in bond prices may attract only limited new selling. If prices rebound, by contrast, short covering could extend the advance.

He also cited weaker-than-expected employment and inflation data as a basis for the shift in view. Those figures support a more accommodative response from the Federal Reserve. Pliete also said market concerns about Fed Chair Kevin Warsh's commitment to fighting inflation are overdone.

Citadel's cross-asset model also pointed to the potential for a Treasury rally. In 64 instances since 2003 when growth and monetary-policy signals resembled current conditions, Treasury yields fell over the following 120 days in 71% of cases, according to Pliete. The average decline was 0.25 percentage point.