Investors Stung by Treasuries Rout Brace for Next Blow From Fed

A swift reassessment of how high the Federal Reserve will raise interest rates this year has rocked the bond market in recent weeks. Now, the market faces a bigger threat: the growing notion that rates will stay elevated even after the US central bank’s inflation fight is all over.

Upside surprises in January employment, inflation and retail sales data are fueling both conversations simultaneously. While a higher peak for rates now seems almost certain, the economy’s resilience in the face of almost a year’s worth of aggressive tightening is also increasingly raising doubts over whether the level of rates which can be considered “neutral” for growth is really as low as it used to be.

Fed officials have so far maintained that neutral is still around 2.5% — the same as before the pandemic began — and they would probably be expected to return there once inflation is beaten. Any revision of that view would threaten to push yields on longer-term Treasury securities to fresh new highs in 2023.

“Our thought is that markets, and perhaps Fed policymakers, don’t have the right number for the long-run rate,” said Praveen Korapaty, the chief interest-rates strategist at Goldman Sachs Group Inc. in New York. “The labor market continues to be strong. That is going to be a big deterrent to the Fed actually easing aggressively.”