Castle Securities Abandons Bearish Stance on U.S. Treasuries, Says Market Underestimates Economic Slowdown Risk

Castle Securities abandons its bearish stance on U.S. Treasuries, stating that the market has largely priced in inflation risks from soaring oil prices but has underestimated the potential damage to global growth.

Macro strategist Frank Flight said that Castle Securities has shifted its view on U.S. government bonds to “neutral,” and if the Iran conflict persists or is resolved relatively quickly, short-term global bonds could rise.

He pointed out that if oil transportation is disrupted long-term, investors will prepare for a slowdown in economic growth, which could pressure markets and corporate bonds, but demand for short-term government bonds might increase.

Another scenario is that if tensions ease, traders may withdraw their hawkish rate bets accumulated since the conflict began, creating room for yields to fall.

In a client report on Monday, Flight wrote: “At current valuation levels, we believe there is limited room to short U.S. fixed income assets. The ‘tail risks’ of rising inflation and slowing growth are showing asymmetric fat tails.”

As the conflict threatens global economic growth, more investors are betting that the wave of selling in global bonds may be nearing its end, with Castle Securities being one of them. On Monday, U.S. Treasuries and other government bonds rose together, pushing the two-year yield down by two basis points to around 3.70%.

Even before the escalation of tensions with Iran, Castle Securities pointed out that due to resilient growth, tariffs, and government spending putting continued pressure on consumer prices, the market underestimated U.S. inflation risks. Although the company still expects the Federal Reserve to keep interest rates unchanged this year, the market has largely begun to shift toward this view.

Flight said that oil prices are unlikely to stay near $100 per barrel. If tensions ease, oil prices could fall to $70; if supply disruptions worsen, prices could jump to $150. In a high oil price environment, tightening financial conditions could ultimately suppress economic growth and inflation expectations, reducing the need for rate hikes by the central bank.

He stated that positioning along the yield curve to benefit from a steepening (where short-term bonds outperform long-term bonds) can provide “optimal protection” in various scenarios.

He explained that this is because if tensions ease, short-term bonds will rise, but if inflation accelerates and risk assets remain supported, the yield curve could experience a “bear steepening” (where long-term bonds fall more than short-term bonds).