High bond yields imperil America’s financial stability

Interrogatinga fairy tale is not usually the best use of an investor’s time. But there may be an exception. The internal logic of “Goldilocks and the Three Bears”, and the idea that the economy can be “just right” for financial markets, merits some inspection.Earlier this year, the prospect of a seemingly inevitable American recession—the result of rising interest rates—peppered conversations across the financial world. Now, with inflation falling rapidly, looking strong and the Federal Reserve at least slowing the pace of interest-rate rises, talk is instead of a “Goldilocks” situation: an economy that is neither too hot (with surging inflation) nor too cold (with unpleasantly high unemployment). As the economic picture has grown brighter, yields on American government bonds have ticked ever higher. The yield on ten-year Treasuries is now 4.2%, up from 3.8% at the beginning of the year. Real yields, adjusted for inflation expectations, are at their highest since 2009.