Citadel Securities says economic strength drives higher yields

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Photo by TIMOTHY A. CLARY/AFP via Getty ImagesThe Treasury selloff that sent yields to multi-decade highs reflects stronger United States growth and competition for capital rather than rising inflation concerns, according to Citadel Securities.THIS CONTENT IS RESERVED FOR SUBSCRIBERS ONLYSubscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman, and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.SUBSCRIBE TO UNLOCK MORE ARTICLESSubscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.REGISTER / SIGN IN TO UNLOCK MORE ARTICLESCreate an account or sign in to continue with your reading experience.Access articles from across Canada with one account.Share your thoughts and join the conversation in the comments.Enjoy additional articles per month.Get email updates from your favourite authors.THIS ARTICLE IS FREE TO READ REGISTER TO UNLOCK.Create an account or sign in to continue with your reading experience.Access articles from across Canada with one accountShare your thoughts and join the conversation in the commentsEnjoy additional articles per monthGet email updates from your favourite authorsSign In or Create an AccountAlmost all of September’s increase in 10-year yields came from real yields, while inflation expectations remained relatively stable, Nohshad Shah, Citadel’s head of EMEA fixed-income sales, wrote in a Monday client note. Higher real — or inflation-adjusted — yields reflect an economy supported by fiscal easing, loose financial conditions and heavy investment in artificial intelligence.This advertisement has not loaded yet, but your article continues below.The market is “repricing the strength and persistence of growth… and the real rates required to accommodate it,” he wrote. “Investors are essentially demanding a higher return after inflation, not simply more protection against it.”Canada's best source for investing news, analysis and insight.By signing up you consent to receive the above newsletter from Postmedia Network Inc.A welcome email is on its way. If you don't see it, please check your junk folder.The next issue of Investor will soon be in your inbox.We encountered an issue signing you up. Please try againStronger prospective returns encourage AI investment, but financing that spending — alongside persistent government deficits — increases competition for capital, requiring more savings or higher real returns to attract them, he noted.That dynamic makes Shah reluctant to call a top in yields simply because inflation eases. At the same time, he cautioned, a further increase in yields would require “fresh repricing of growth, policy, or term premia.”The current market expectations for about four Federal Reserve rate increases over the next 12 months is “reasonable,” given sticky inflation and resilient demand, he added.“My concern is that fiscal support and strategic AI investment make parts of demand less rate-sensitive, whilst de-globalization and physical constraints limit the goods disinflation available to offset sticky services inflation,” he wrote.This advertisement has not loaded yet, but your article continues below.Higher real rates could also test the AI boom. With an estimated one-third of hyperscaler capital spending debt-financed this year, Shah said future cash generation becomes more important as financing costs rise. He reiterated his preference for hyperscalers such as Microsoft Corp. and Alphabet Inc.’s Google, whose economics extend beyond selling access to AI models.“The boom can justify a higher real cost of capital… but it cannot make that cost irrelevant,” Shah wrote.We apologize, but this video has failed to load.This advertisement has not loaded yet.Notice for the Postmedia NetworkThis website uses cookies to personalize your content (including ads), and allows us to analyze our traffic. Read more about cookies here. By continuing to use our site, you agree to our Terms of Use and Privacy Policy.