What does a 2.7% 10-year bond yield tell us?

To have the 10-year bonds at this low of an interest rate is pretty amazing. It tells you something about inflation and/or growth. Over the last year, the inflation rate has been 1.2 percent. If that holds, it implies a real return on bonds of only 1.5 percent. What it does mean is that people's expectations of inflation and growth are both very low.

The 10-year Treasury yield sliding to a 16-month low of 2.68% shouldn't be ignored or explained away. . . . Clearly, at minimum, the 10-year yield at these levels reflects the general reduction in U.S. growth assumptions, both about last quarter and the second half of the year. Yet there is probably more going on here than bonds reliably pricing in another economic contraction that would upend stocks. There's even a chance that neither stocks nor bonds have the outlook wrong. The argument between the two asset classes might instead be a subdued and agreeable discussion.

At the most basic level, both markets seem to have internalized the idea that the Federal Reserve's zero-rate policy is the law of the land for the investable future, and policy makers stand ready to throw money at the economy's problems, be they evident or hypothetical. With overnight lending rates at zero and the two-year note yield barely above half a percent in yield, the incentives for banks and other leveraged investors to simply coast along the yield curve remain strong, even at 2.68% on the 10-year. . . .