Citadel Says 2 US Asset Classes to Rise as Iran Risks Recede

A de-escalation of the US-Iran conflict has the potential to lift both US stocks and bonds in tandem, according to a new analysis from trading giant Citadel Securities.

Both US stocks and bonds are poised to rise as the conflict between the US and Iran moves toward de-escalation, even with continued tensions around the Strait of Hormuz, according to a client note from Citadel Securities.

"Ultimately, this will not be a comprehensive agreement, but more of a freeze-for-freeze arrangement designed to buy time, reduce immediate escalation risks, and stabilize oil markets without resolving the underlying disputes," Nohshad Shah, Head of EMEA Fixed Income Sales at Citadel Securities, wrote in the report. "This is sufficient for markets and investors focused on the reopening of the Strait of Hormuz."

The analysis suggests that while a formal agreement is not yet in place, both the US and Iran have strong incentives to negotiate, given the high cost of further escalation. The potential for a limited framework deal—where Iran accepts partial restrictions on nuclear enrichment for modest sanctions relief—is seen as the most probable outcome. This geopolitical relief could lead to less aggressive rate hikes from European and UK policymakers than markets currently expect.

The core of the thesis rests on risk reduction, where a dialing back of geopolitical tensions lowers the risk premium on assets. However, Citadel Securities also warns that the resulting easing of financial conditions could fuel inflation, particularly in the US where AI-related spending, fiscal stimulus, and a tight labor market are already supporting price pressures.

Inflation and Fed Leadership Risks

The report flagged a key domestic risk: a potential change in Federal Reserve leadership. Shah noted that Kevin Warsh, a successor to the Fed chair position nominated by former President Trump, has emphasized inflation metrics that exclude extreme price swings. This "trimmed mean" approach, Shah warned, could cause policymakers to react too slowly to changing inflation dynamics, as turning points often occur in the statistical "tails" that such metrics are designed to ignore.

"Warsh is choosing an inflation metric that is convenient for his narrative, which directly contradicts his previous criticism of the Fed for being slow to react during the pandemic-era inflation," Shah wrote. This critique comes as Citadel Securities, a firm executing about 24% of all US equity orders, expands its influence from high-speed retail order flow into the institutional "high-touch" trading space traditionally dominated by investment banks.

A New Wall Street Rivalry

The firm's growing ambition was highlighted in JPMorgan Chase & Co. CEO Jamie Dimon's recent shareholder letter, which named Citadel Securities as a fierce competitor. The trading giant has been actively poaching senior talent from banks, including former Goldman Sachs executive Jim Esposito as its president, to build out its institutional client business. While Esposito has stated that becoming a bank is "not at all a goal," the direct competition has led JPMorgan to stop sending its own large equity orders to Citadel Securities, according to Bloomberg reports.

By leveraging its advanced technology and deep liquidity pools, Citadel Securities offers institutional clients like the $839 billion manager AllianceBernstein LP an alternative to traditional bank trading desks. The firm's ability to provide unique market insights, derived from its vast retail order flow and sophisticated data analysis, represents a new competitive challenge to Wall Street's established order.

This article is for informational purposes only and does not constitute investment advice.