Citadel Securities has abandoned its bearish position on U.S. Treasuries, stating that the market has largely priced in the inflation risks stemming from the surge in oil prices but has underestimated the potential damage to global growth.
Macro strategist Frank Flight indicated that Citadel Securities has shifted its view on U.S. government bonds to "neutral." He noted that if the conflict involving Iran persists or is resolved relatively quickly, there is potential for global short-term bonds to rise.
He pointed out that if oil transport disruptions are prolonged, investors will prepare for an economic slowdown. In such a scenario, markets and corporate bonds could face pressure, while demand for short-term government bonds might increase.
Alternatively, if tensions ease, it could prompt traders to unwind the relatively hawkish interest rate bets accumulated since the conflict began, creating room for yields to decline.
Flight wrote in a client report on Monday, "At current valuation levels, we see limited room for further shorting of U.S. fixed income assets. It feels like the 'tail risks' of upside inflation and downside growth are exhibiting an asymmetric fat-tail characteristic."
Citadel Securities is among a growing number of investors betting that the sell-off in global bonds may be nearing its end as the conflict threatens worldwide economic growth. On Monday, U.S. Treasuries rose alongside other government bonds, pushing the two-year yield down by two basis points to around 3.70%.
Even before the escalation of tensions involving Iran, Citadel Securities had argued that the market was underestimating U.S. inflation risks due to resilient growth, tariffs, and government spending keeping consumer prices elevated. While the firm still expects the Federal Reserve to keep interest rates unchanged this year, the market has largely begun to shift toward this view.
Flight stated that oil prices are unlikely to remain near $100 per barrel. If tensions ease, prices could slide toward $70; if supply disruptions worsen, they could jump to $150. In a high oil price scenario, tighter financial conditions could ultimately curb economic growth and inflation expectations, thereby reducing the need for central banks to raise interest rates.
He suggested that positioning for a steeper yield curve—where short-term bonds outperform long-term bonds—could offer investors the "best protection" across various scenarios.
He explained that this is because if the conflict eases, short-term bonds would rise, while if inflation accelerates and risk assets remain supported, the yield curve could experience a "bear steepener," where long-term bonds fall more sharply than short-term bonds.
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