Regarding the recent climb of US Treasury yields to multi-decade highs, Citadel Securities attributes the move to robust US economic growth and intensifying competition for capital, rather than heightened market concerns about inflation.

Nohshad Shah, Citadel Securities' head of fixed income sales for Europe, the Middle East, and Africa, wrote in a note to clients on Monday that the September rise in 10-year US Treasury yields came almost entirely from real yields, while inflation expectations remained relatively stable.

Real yields, which are adjusted for inflation, reflect a US economy supported by fiscal easing, accommodative financial conditions, and massive investment in artificial intelligence. He wrote that the market is "assessing the strength and sustainability of economic growth... and the real interest rate needed to accommodate that growth." "Investors are essentially demanding higher after-inflation returns, not just more protection against inflation."

Shah pointed out that higher potential returns encourage companies to increase AI investment, but the related financing activity and persistent government deficits intensify the competition for capital, requiring higher real returns to attract funds.

Shah is unwilling to conclude that yields have peaked simply because inflation is slowing. However, he also warned that any further rise in yields would require the market to "reprice growth, policy, or term premium anew." He added that, given sticky inflation and resilient demand, the market's current expectation of about four Federal Reserve rate hikes over the next 12 months is "reasonable."

Rising real interest rates could also test the AI boom. Shah estimates that about one-third of hyperscalers' capital expenditure this year is debt-financed, so as financing costs rise, the ability to generate future cash flows will become more important. He reiterated his bullish view on hyperscalers such as Microsoft and Google, because their business models are not merely about selling access to AI models.