The recent selloff that pushed Treasury yields to heights not seen in decades is, in Citadel's view, a story of stronger growth and increased competition for funding. Shah wrote that almost the entire September move higher in the 10-year was driven by real yields, with inflation expectations staying relatively steady. In his words, the market is "repricing the strength and persistence of growth... and the real rates required to accommodate it," and "Investors are essentially demanding a higher return after inflation, not simply more protection against it."
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Shah tied higher real rates to an economy buoyed by fiscal easing, easy financial conditions, and heavy spending on artificial intelligence. Better potential returns encourage more AI investment, but funding that outlay, alongside ongoing government deficits, intensifies the battle for savings. In practice, attracting capital will require a bigger pool of savings or richer inflation-adjusted returns. Because of that backdrop, he is hesitant to declare a peak in yields on the basis of easing inflation alone, and said another leg up would likely require "fresh repricing of growth, policy, or term premia."
He also said markets are now penciling in roughly four Federal Reserve hikes over the next year, a path he called "reasonable," pointing to sticky inflation and resilient demand. His concern: "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."
Higher real rates can be a stress test for the AI trade. Shah estimates roughly one-third of hyperscalers' capital spending this year is financed with debt, which, as borrowing costs climb, puts a premium on future cash generation. He maintained a tilt toward the hyperscalers, including Microsoft Corp. and Alphabet Inc.'s Google, whose business models are not confined to selling access to AI models. As he put it, "The boom can justify a higher real cost of capital…but it cannot make that cost irrelevant." For everyday investors, the through-line is simple: if real rates stay higher for longer, cash flows and balance sheets matter more, and stories that only work with cheap money get a tougher audience.
If growth expectations drove this move, the playbook is not the usual one. Get the free Market Briefs daily newsletter and think it through.
