Investors stung by Treasuries rout brace for next Fed blow One year of war against Ukraine: Acting together to ensure international law will prevail

By Michael MacKenzie & Liz Capo McCormick Bloomberg Opinion

Aswift reassessment of how high the federal Reserve will raise interest rates this year rocked the bond market once again tuesday. the problem for those burned by the now weeks-long slump is that an even bigger threat looms: the growing belief that rates will stay elevated even after the fed’s inflation fight is 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 percent—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 new highs in 2023.

“Our thought is that markets, and perhaps Fed policymakers, don’t have the right number for the longrun 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.”

Treasuries began a holiday-shortened week with steep losses after more better-than-expected data— US purchasing managers indices from S&P Global—showed ongoing strength in the economy in February. The benchmark 10-year rate climbed to 3.95 percent, a fresh high for the year. European yields jumped Tuesday too and the bond selloff continued into the Australian and New Zealand markets on Wednesday.

The US central bank has in the span of 11 months raised its benchmark federal funds rate from nearly zero to above 4.5 percent, and now seems poised to take it as high as 5.4 percent by midyear, according to prices of overnight index swaps. It hasn’t been above 5 percent since 2007.

Back then, the neutral rate was also presumed to be much higher— around 4 percent—and the 10-year Treasury yield traded between 4.5 percent and 5 percent. In the years following the financial crisis, estimates of the neutral rate slid to 2.5 percent as investors and policymakers became pessimistic about the economy’s long-term growth prospects.

Anchoring bonds

Th AT has helped anchor the Fed’s outlook for interest rates—officials see the federal funds rate reverting to about 4 percent by the end of next year and around 3 percent by the end of 2025, according to quarterly projections last updated in December—and bolstered buyers of longduration Treasuries, even after the 10-year yield briefly rose above 4 percent late last year.

But broader acceptance of the idea that the neutral rate—known in economics circles as “r-star”—has gone up would have adverse implications for a Treasury market nursing back-to-back down years. A higher neutral rate should raise yields across the curve, led by rising short-term rates along with some restoration of continued from A18 become increasingly complex. a term premium for owning longerdated Treasuries.

The administration on Sunday said it has new intelligence suggesting that China, which has generally remained on the sidelines of the conflict, is now considering sending Moscow lethal aid. Secretary of State Antony Blinken said it could become a “serious problem” if Beijing follows through.

Fed officials have so far maintained that neutral is still around 2.5 percent—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 new highs in 2023.

“The 2 percentage point drop in estimates of r* following the global financial crisis rests on shaky ground,” Matthew Raskin, the head of US rates strategy at Deutsche Bank Securities in New York, wrote in a February 10 note. “If growth and the labor market remain resilient,” then investors can expect Fed officials to upgrade their estimates, which “would have big implications for longer-run rates,” he said.

Estimating the neutral rate is more art than science, but the Fed spends plenty of time trying to figure it out, and some of its models are showing an increase. One of them, maintained by the Richmond Fed, now has it at about 1.3 percent on an inflation-adjusted basis, up from around 0.5 percent in 2016. That would translate to a rise in the nominal neutral rate to 3.3 percent from 2.5 percent.

The central bank will publish a fresh set of projections at its next policy meeting in March, but policymakers may be reluctant to jolt the bond market with upgrades to their official r-star estimates so soon, according to Gargi Chaudhuri, the head of iShares investment strategy for the Americas at BlackRock in New York. And even if the estimates were to go up, Fed Chair Jerome Powell would probably try to downplay the development, she said.

“The last 12 months of labor market strength is not enough to call for a higher neutral rate,” Chaudhuri said. “It could well be that 2.75 percent, 3 percent is the right level. We don’t know quite yet.”

Changing relationships

PA RT of the problem relates to uncertainty over the lag time between policy tightening and the impact it has on the economy, as well as how the unusual experience of the pandemic may be affecting it. For many bond investors, that raises questions about how much stock to put into any estimates.

“R-star is a very theoretical concept, and I think it’s really a question of interest-rate sensitivity and the long and variable lags associated with tightening,” said John Madziyire, a fixed income portfolio manager at The Vanguard Group in Malvern, Pennsylvania.

“Interest rate sensitivity is much lower” at the moment because homeowners and companies locked in low borrowing costs before rates began rising last year, Madziyire said. “So, all these rate hikes potentially haven’t really impacted the economy.”

Biden and Zelenskyy discussed capabilities that Ukraine needs “to be able to succeed on the battlefield” in the months ahead, said US National Security Adviser Jake Sullivan. Zelenskyy has been pushing the US and European allies to provide fighter jets and long-range missile systems known as ATACMS—which Biden has declined to provide so far. Sullivan declined to comment on whether there was any movement on that during the leaders’ talk. With no quick end in sight for

By Josep Borrell

febRuARy 24, 2022 will forever be recalled as the day when Russia started its brutal, unprovoked and illegal invasion of ukraine. this was and remains a case of pure aggression and a clear-cut breach of the u N Charter. this war is neither “just a european issue”, nor is it about the “west versus the rest”. it is about the kind of world we all want to live in: no one is safe in a world where the illegal use of force—by a nuclear power and permanent member of the security Council—would somehow be “normalized.” that is why international law must be enforced everywhere to protect everyone from power politics, blackmail and military attack.

One year on, there is a risk that people become inured to the images of war crimes and atrocities that they see—because there are so many; that the words we use start to lose their significance—because we have to repeat them so often; that we get tired and weaken our resolve—because time is passing and the task at hand is hard.

This we cannot do. Because every day, Russia keeps violating the UN charter, creating a dangerous precedent for the whole world with its imperialist policy. Every day, Russia keeps killing innocent Ukrainian women, men and children, raining down its missiles on cities and civilian infrastructure. Every day, Russia keeps spreading lies and fabrications.

For the European Union and our partners, there is no alternative to staying the course of our “triple strategy”: supporting Ukraine, putting pressure on Russia to stop its illegal aggression and helping the rest of the world cope with the fallout.

This is what we have been doing for one year now—and successfully so. We have adopted unprecedented sanctions; cut our dependency on Russian fossil fuels; and in close collaboration with key partners reduced by 50 percent the energy revenues the Kremlin gets to finance its aggression. Working together, we have also mitigated the global ripple effects with food and energy prices declining, partly thanks to our Solidarity Lanes and to the Black Sea Grain Initiative.

It is not enough to say that we want Ukraine to be able to defend itself—it needs the means to do so.

So, for the first time ever, the European Union has supplied weapons to a country under attack. Indeed, the EU is now the leading provider of military training for Ukrainian personnel so they can defend their country. We are also offering significant macro-financial and humanitarian aid to support the Ukrainian people. And we have decided to respond positively to Ukraine’s request to join the EU. Finally, we are working to ensure accountability for the war crimes that Russia has committed.

Ukraine has shown its remarkable resilience, partly thanks to this support. And Russia has grown more isolated, thanks to global sanctions and the international condemnation by the overwhelming majority of states in the UN General Assembly. Our collective goal is and remains a democratic Ukraine that prevails; pushing out the invader, restoring its full sovereignty and, with that, restoring international legality.

Above all, we want peace in Ukraine, a comprehensive and lasting peace that is in line with the UN Charter and international law. Supporting Ukraine and working for peace go hand in hand

If Russia’s illegal aggression were to succeed, the repercussions would spread globally. The risk of regional hotspots in Asia, such as the South and East China Seas, the Taiwan Strait and others, to turn into open conflicts would increase. That is why Europe and its partners in the Asia Pacific have to take a joint stand. The support of many Asian countries at the UN and elsewhere for the principles of territorial integrity, sovereignty and international law has been crucial.

But the reverse is also true: the EU is fully committed to uphold international law everywhere, not just in Ukraine. We work for peace and security around the world including in the Asia Pacific.

We need to be clear that Russia’s actions are responsible for the economic shockwaves in terms of food, energy and fertilizers. We have always exempted food and fertilizers from EU sanctions and we are monitoring any possible unintended effects.

More broadly, the Russian invasion has underlined the need for both Europe and Asia to avoid excessive dependencies. We must reinforce our collaboration to build more resilient and inclusive economies, protect our democracies and strengthen social cohesion. history and justice are on the side of Ukraine. But to accelerate history and achieve justice, we need to amplify our “triple strategy.” We know this is a collective task. That is why the EU is counting on all its partners, to act in a spirit of joint responsibility and solidarity: to ensure that aggression fails and international law prevails.

Mr. Josep Borrell Fontelles is the EU High Representative for Foreign Affairs and Security Policy and Vice President of the European Commission.