"The brutal summer" prophecy takes a sharp turn! Castle Securities turns bullish on U.S. bonds, betting on a decline in long-term yields.

Just last month, Frank Flaherty, the macro strategy head at Citadel Securities, who warned U.S. bond investors of a "brutal summer," now believes that the risk balance has swung in favor of a rebound in U.S. Treasuries. In a report on Tuesday, he wrote: "We now believe that the asymmetry of risk has shifted towards a decline in long-end yields." Recently, U.S. long-term Treasuries have been under pressure due to market concerns over inflation, the fiscal deficit, and significant debt issuance by tech companies financing AI infrastructure spending. The yield on the 30-year U.S. Treasury soared last week to its highest level in nearly 20 years, prompting Treasury Secretary Janet Yellen to announce plans to expand buybacks of government bonds with maturities between 10 and 30 years to curb the bond market's plunge. Flaherty pointed out that short positions in the bond market are overcrowded, while inflation data is improving. He added that simulations conducted by Citadel Securities on trend-following strategies such as CTA show that the current short positions of these strategies are "quite extreme" compared to recent historical levels. This indicates that if U.S. Treasury prices decline further, it may only trigger limited additional selling; conversely, if the bond market continues to rebound, it could force short sellers to cover their positions. This bullish stance marks a shift in Flaherty's position. At the beginning of July, he warned that bond investors were underestimating the resolve of newly appointed Federal Reserve Chair Kevin Walsh to combat inflation and called for a rate hike at the Fed's meeting on July 29. At that time, most economists expected the Fed to keep rates unchanged, making his view contrarian. However, the Fed ultimately decided to maintain rates at that meeting. Nevertheless, Walsh's remarks at the press conference raised market doubts about his commitment to fighting inflation, further fueling the sell-off in long-duration Treasuries. Now, Flaherty believes that concerns about the market's faith in Walsh's policies have been exaggerated, as recent economic data, including weak employment and inflation figures, "seem to have corroborated a more dovish policy response function." The strategist also viewed Citadel Securities' cross-asset model as another reason to be bullish on Treasuries. He noted that since 2003, during 64 historical periods of monetary policy signals similar to the current situation, yields have decreased 71% of the time over the following 120 days, with an average decline of 0.25 percentage points. It is worth noting that some signs in the bond market seem to corroborate Flaherty's views. Despite long-term Treasury yields remaining near multi-year highs, the latest market indicators show that the U.S. Treasury's intervention has begun to take effect, and traders are increasingly reluctant to oppose what the market refers to as the "Yellen Put" policy. Since Yellen announced the expansion of buybacks, U.S. Treasuries have significantly outperformed interest rate swaps of the same maturity, with the spread between the 30-year Treasury yield and swap rates narrowing to its lowest level since February of this year. Meanwhile, the benchmark Treasury yield experienced a brief period of volatility following the policy announcement and is now also beginning to trend downwards. The impact of the Treasury's policy is also evident in the options market. Over the past week, options linked to long-term U.S. Treasury futures have noticeably shifted to bullish, with demand for call options relative to put options rapidly increasing. In contrast, the skew in options for short-term Treasury futures remains close to neutral levels seen in recent months, indicating that the current market focus on policy intervention is concentrated mainly at the long end of the yield curve. Some derivatives brokers have stated that the true "trading opportunity" in the current market is concentrated at the long end. They suggested that if there is a prevailing sense of "fear" in the market, it is the fear that further government intervention could lead to a sudden and significant drop in long-term yields. In other words, while investors were primarily concerned about continued selling of Treasuries and further spikes in yields, with the Treasury clearly stepping into the market to buy long bonds, some traders are beginning to fear that continuing to short long bonds may lead to sudden policy escalations. While some market participants believe Yellen's intervention is a mistake, traders still face the reality that a well-capitalized buyer that is likely to continue expanding its purchase scale exists in the market. In contrast to Flahertys views is legendary investor and Bridgewater founder Ray Dalio. Last week, Dalio warned that a U.S. debt crisis could emerge within "about three years, give or take two years." He further stated that investors should reduce their bond holdings and allocate up to 15% of their funds to gold to hedge against the risks of a U.S. debt crisis. Currently, the market is still focused on the massive borrowing, geopolitical risks, and the future policy path of the Federal Reserve. Particularly noteworthy is the fact that, according to the latest data released by the U.S. Treasury on August 19, 2026, the total federal government debt has exceeded $40 trillion for the first time. In Dalio's view, the key issue is not just the absolute size of the debt, but the growing imbalance between government debt supply and market demand. He likens the government debt system to the human circulatory system: if debt can be effectively converted into productivity and income growth, the debt itself does not necessarily pose a problem; however, if debt growth fails to generate sufficient income to repay principal and interest, debt servicing will gradually crowd out other fiscal expenditures. When debt supply exceeds market demand, Dalio believes two outcomes usually occur: one is rising interest rates, which further increase economic and government financing costs; the other is the central bank providing liquidity through interest rate cuts and government bond purchases, but this may come at the cost of currency depreciation and higher inflation. This could ultimately form a self-reinforcing cycle of "debtcurrency expansioninflation." Additionally, Hoisington Investment Management, which has been bullish on U.S. Treasuries for more than thirty years, also pressed the "turnaround button" at the beginning of July. This legendary firm in the fixed income sector has completely adjusted its investment stance, which has been in place for over thirty years. Regulatory filings show that the firm is significantly reducing the sensitivity of its bond portfolio to long-term interest rate changes. In its quarterly report, Hoisington Investment Management pointed out that the widening fiscal deficit and increased capital demand form a "broader structural background," indicating that both inflation and long-term Treasury yields are likely to trend upward. This report, co-signed by the firm's founder Van R. Hoisington and Chief Economist Lacy Hunt, breaks the institution's long-standing bullish stance on U.S. Treasuries over the past few decades. Fixed income investors are now generally concerned that future inflation may not only remain at higher levels but also increase in volatility. Inflation could erode the real returns on bonds while keeping interest rates elevated for a more extended period. Van R. Hoisington stated in the report that the "long-term equilibrium range for inflation is migrating upwards," likely between 3.5% and 4.5%, "with a significant risk of the inflation rate temporarily exceeding 5%." The sustained expansion of debt is another risk of concern for Hoisington. The report claims that it is prompting investors to "increasingly demand a higher risk premium for U.S. Treasuries." The requirement for a higher risk compensation implies that future interest rate environments may not be "as stable as they were from 1990 to 2020."