Just last month, Frank Flight, head of macro strategy at Castle Securities, cautioned bond investors to brace for a "brutal summer." Now, he believes the risk pendulum has swung toward gains, citing overcrowded short positioning and improving inflation data. In a report released Tuesday, Flight wrote, "We now view the asymmetry of risks as favoring a decline in long-term yields."

Long-dated U.S. Treasuries have been under sustained pressure recently, weighed down by inflation concerns, a widening fiscal deficit, and heavy debt issuance from tech companies financing AI infrastructure. The 30-year Treasury yield briefly touched a near two-decade high last week, prompting Treasury Secretary Scott Bessent to announce plans to expand buybacks of longer-dated securities to stem the bond market slide.

Flight noted that Castle Securities' simulations of trend-following strategies, such as commodity trading advisors, indicate short positions are "excessive" relative to recent historical data. This suggests that even if Treasuries fall further, it would only trigger limited selling, whereas a sustained rally could force shorts to cover.

This bullish outlook marks a shift in Flight's position. In early July, he warned that bond investors were underestimating the resolve of newly appointed Federal Reserve Chair Kevin Warsh to combat inflation. At the time, he predicted a rate hike at the Fed's July 29 meeting, while most economists expected no change. The Fed ultimately held rates steady, but Warsh's post-meeting press conference remarks raised doubts about his inflation-fighting commitment and intensified the selloff in long-dated bonds.

Flight now argues that concerns over the Fed's credibility are overstated, as recent economic data—including weak nonfarm payrolls and inflation reports—"appear to justify a more dovish reaction function." He also cited Castle Securities' cross-asset model as another reason for optimism. He wrote that since 2003, in 64 historical periods where growth and monetary policy signals resembled current conditions, Treasury yields fell in the subsequent 120 days 71% of the time, with an average decline of 0.25 percentage points.