Castle Securities: The Federal Reserve's "wait and see" approach raises concerns, with long-term U.S. Treasury yields nearing a 20-year high intensifying market risks.

Castle Securities believes that the Federal Reserve's reluctance to further tighten monetary policy despite inflation remaining persistently above target is leading to long-term U.S. Treasury yields staying at multi-year highs, which could pose ongoing risks to the broader financial market. Nohshad Shah, head of fixed income sales for Europe, the Middle East, and Africa at Castle Securities, noted in the latest client report that although the Fed's policy rate has fallen 175 basis points from its previous peak, long-term U.S. Treasury yields remain near the highest levels seen in nearly 20 years. This divergence reflects the bond market's questioning of policymakers' confidence in handling difficult situations. Shah expressed that, in his view, the current market believes that both the Fed and the fiscal authorities tend to lean towards a relatively loose path when faced with challenging policy choices. As long as this perception persists, it may continue to be a significant risk facing the financial markets. On Monday, the yield on the 30-year U.S. Treasury rose to its highest level in 19 years, briefly surpassing 5.28%. Despite last week's data indicating signs of cooling in U.S. inflation and consumer demand, long-term Treasury yields remain elevated, showing that investors are still demanding higher returns to hold long-term bonds. Shah warned that the market should not assume that interest rate risks have been fully mitigated just because there have been recent improvements in inflation and signs of weakness in the job market. He pointed out that over 55% of core commodity prices are still rising, indicating that underlying price pressures have not completely faded. In this context, the Fed's policy meeting next month will still face very difficult choices, with considerable uncertainty about whether rate adjustments are needed. Recent U.S. economic data has sent intertwined signals. On one hand, inflation and consumer demand have cooled, and signs of weakness have appeared in the job market; on the other hand, price pressures remain significantly above the Fed's target. This has led the market to continuously assess whether the Fed needs to further tighten policy and whether policymakers' tolerance for persistently high inflation could further elevate long-term rates. Beyond the interest rate market, Shah also discussed the changing investment logic in artificial intelligence. He believes that as competition in the AI industry enters a new phase, investment opportunities may gradually shift from developing more advanced cutting-edge AI models to supporting the cloud computing and infrastructure necessary for AI operations. In his view, large-scale cloud computing companies like Microsoft Corporation (MSFT.US) and Alphabet Inc. Class C may have clearer paths to AI commercialization. These companies can generate revenue by providing computing power, AI inference services, and extensive product and customer distribution channels, offering potentially higher visibility for investment returns compared to cutting-edge AI model developers like OpenAI and Anthropic. This suggests that after intense competition surrounding large model capabilities and training investments, the main focus of AI investments may increasingly tilt towards platform companies that possess computing power infrastructure and commercialization channels. Castle Securities believes that the ability to convert substantial AI capital investments into stable income and returns will become a key factor in the next phase of evaluating the value of AI investments.