Bond investors appear to be bracing for a grim economic outlook. The yield on the 10-year US Treasury has fallen to 2.38%, its lowest level since December 2017 – down 30 basis points (bps) so far this year and 88bps below last October’s peak. Meanwhile, portions of the US yield curve have started to invert, including the 3-month to 10-year spread – the Federal Reserve's favored measure – which is viewed by many as an early warning sign of recession.

The economic pessimism of bond investors reflects some legitimate worries – notably indications of slowing growth in recent data from the US, Europe, and China. But we still see reasons why the bull market in stocks and the economic upswing will extend rather than end.