Game of Trades: This is Unlike Anything We’ve Seen

The three-month U.S. Treasury bill has hit a 5 percent yield. That’s the first time in 16 years that a short-term bond offered such a high return.

With inflation under 5 percent, that short-term bond also offers investors a solid real return. That’s the highest level since 2007. Some see danger ahead, as 2007 was the year of the market peak before the 2008 market crash.

The rapid rise in interest rates fueled a bear market in 2022. Many still talk of a “soft landing” where the economy slows but doesn’t hit a recession.

Unfortunately, the central bank has a poor track record trying to cool the economy without crashing it.

In the worst-case scenario, a deflationary spiral could result. That means consumers cut back on spending. Companies lower prices to lure consumers, but demand remains slack. That leads to further price cuts.

While that sounds great for consumers, it’s not good for business. It means bankruptcies, layoffs, and significantly higher employment.

That’s why central banks have fought so hard to avoid deflation in recent years. The recent jump in inflation caused them to change their tune.

That leaves markets in a new and unique circumstance. Investors will want to be more nimble given the possibility for more volatile markets and more pressure for corporations.

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