Castle Securities believes the Federal Reserve's reluctance to tighten monetary policy further, despite inflation running above target for an extended period, is keeping long-term Treasury yields at multi-year highs and may pose ongoing risks to broader financial markets.

Nohshad Shah, Head of Fixed Income Sales for Europe, the Middle East, and Africa at Castle Securities, noted in a recent client report that long-term U.S. Treasury yields remain near their highest levels in nearly 20 years, even though the Fed's policy rate has already been cut by 175 basis points from its previous peak. This divergence reflects growing market skepticism about the ability of monetary and fiscal policymakers to navigate a difficult environment. Shah stated that, in his view, the market currently perceives both the Fed and the Treasury as leaning toward a relatively accommodative path when confronted with tough policy choices. As long as this perception persists, it is likely to remain a significant risk for financial markets.

On Monday, the 30-year U.S. Treasury yield climbed to its highest level in 19 years, briefly surpassing 5.28%. Despite last week's data showing signs of cooling inflation and consumer demand, long-term yields have stayed elevated, indicating that investors still demand higher compensation for holding long-dated bonds. Shah cautioned that markets should not assume interest rate risks have been fully resolved simply because inflation has improved recently and the labor market has weakened. He pointed out that more than 55% of core goods prices are still rising, suggesting underlying price pressures have not fully subsided. In this context, the Fed's next policy meeting next month is expected to involve very difficult choices, with considerable uncertainty over whether further rate adjustments are necessary.

Recent U.S. economic data has delivered mixed signals. On one hand, inflation and consumer demand have cooled, and the labor market is showing signs of weakness; on the other hand, price pressures remain clearly above the Fed's target. This has kept markets continuously assessing whether further policy tightening is needed and whether policymakers' tolerance for persistently high inflation could push long-term yields even higher.

Beyond the rates market, Shah also addressed the shifting dynamics of AI investment logic. He argued that as competition in the AI industry enters its next phase, investment opportunities are likely to gradually migrate from developing more advanced frontier AI models to the cloud computing and infrastructure sectors that support AI operations. In his view, hyperscale cloud providers like Microsoft (NASDAQ: MSFT) and Alphabet (NASDAQ: GOOGL) may have clearer paths to AI commercialization. These companies can generate revenue by offering computing power, AI inference services, and leveraging their extensive product and customer distribution channels, potentially making their investment returns more visible compared to frontier AI model developers like OpenAI and Anthropic. This suggests that, following the intense competition over large model capabilities and training investments, the AI investment focus may further shift toward platform companies with computing infrastructure and commercialization channels. Castle Securities believes that who can convert massive AI capital expenditures into stable revenue and returns will be a key factor in how the market evaluates AI investment value in the next phase.