Citrini Research sees bond rally ahead amid Fed policy shift

Investing.com -- The Treasury Department and Federal Reserve are working toward a coordinated policy approach that could push government borrowing toward shorter-term debt and cut the supply of longer-dated Treasuries, potentially triggering a rally in 30-year bonds, Citrini Research said.

The research firm said changes in banking regulation, Treasury debt management and Fed balance-sheet policy are converging in what it calls a new "Treasury-Fed Accord."

Under this framework, the Fed would reduce its balance sheet while commercial banks expand theirs, with banks taking on more Treasury bills as the government moves issuance away from longer maturities. The lower supply could push down long-term yields, Citrini said.

The firm recommended clients bet on 30-year bonds outperforming five-year notes, a trade that would profit if the gap between their yields narrows.

Citrini, founded by James Van Geelen, gained attention earlier this year with its account of an AI-driven economic collapse.

The thesis follows Treasury Secretary Scott Bessent's announcement last week of plans to increase buybacks of long-term bonds. Under what Bessent calls a "Treasury twist," the government could replace some longer-dated debt with bills, reducing pressure on the market after 30-year yields reached their highest level in almost two decades.

"We expect that monetary and fiscal authorities – Fed Chair Kevin Warsh and Treasury Secretary Scott Bessent – are aligned on a framework," Citrini wrote. The framework aims to reduce the Fed's presence in financial markets, improve fiscal sustainability and support growth by allowing banks to lend and invest more, the firm said.

Warsh, who will speak Friday at the annual Jackson Hole symposium, has supported a smaller Fed balance sheet and created a task force to review its size and the maturity of its holdings.

Citrini expects the gap between five- and 30-year yields to narrow over the next three months, through the Treasury's next refunding announcement on November 4, "by which time we think the 'Treasury twist' will become apparent to the market."

Beyond the next few months, Citrini remains bearish on long-term bonds. The firm said Bessent's strategy of keeping economic growth in nominal terms above the government's borrowing cost would leave bondholders with returns below inflation. Lower yields could also encourage more borrowing and add to inflation pressures, it said.

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