The key to conflict resolution is to put yourself in someone else’s shoes. To understand the apparent disconnect between the stronger US economy and lower US Treasury yields, consider it from the perspective of the US Treasury market.

Conventional thinking holds that better economic data lead to expectations of higher short-term interest rates and that bond yields will rise as a result. After all, if the economy is growing, the output gap should narrow and capacity constraints could be reached. The resultant threat of inflation means monetary policy is likely to tighten.

But the causality can run in the other direction, and it is more interesting to consider what the bond market says about the economy than what the economy should say about bond yields. This “tail wagging the dog” approach requires a closer look at three factors: what bond yields tell us; historical precedents for bonds moving independently of official rates; and what bond yields mean for the various actors in the economy.