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Interrogating a fairy tale is not usually the best use of
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an investorss time. But there may be an exception. The
internal logic of tGoldilocks and the Three Bearsu, and

the idea that the economy can be tjust rightu for nancial
markets, merits some inspection.

Earlier this year, the prospect of a seemingly inevitable
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American recessionnthe result of rising interest ratesn
peppered conversations across the financial world. Now,
with inflation falling rapidly, economic growth looking
strong and the Federal Reserve at least slowing the pace
of interest-rate rises, talk is instead of a tGoldilocksu

situation: an economy that is neither too hot (with surging
in ation) nor too cold (with unpleasantly high unemploy-
ment). 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
in ation expectations, are at their highest since 2009.

They are unlikely to fall any time soon. On top of
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buoyant growth figuresnone closely followed estimate
suggests that the American economy may be growing at
nearly 6%nunderlying supply and demand also point
upwards. The government ran a deficit of almost 9% of
GDP in the year to July, an elevated level that is expected
to persist. Meanwhile, the Fed has allowed around
$765bn of Treasuries on its balance-sheet to mature

without replacement since last summer.

426 High bond yields imperil America’s financial stability