Welcome to Thoughts on the Market. I'm Michael Zezes, head of Public Policy and Municipal Strategy for Morgan Stanley.

Along with my colleagues bringing you a variety of perspectives, I'll be talking about the intersection between U.S. public policy and

financial markets. It's Wednesday, August 21st, at 9 a.m. Eastern.

It's been quite a rally for U.S. bond investors of late.

30-year and 10-year Treasury yields are both down about a percent for the year,

with about half that move coming this month alone.

That's boosted returns for high quality fixed income.

The US Treasury Index is up about 6.5% in the year, and the Muni index is up about 7.2%.

After such a strong move, it's natural for investors to think about whether rates might reverse

and go higher, putting these gains at risk.

Our economists and our interest rate strategy team feels pretty good that a meaningful move higher in rates isn't on the horizon because ongoing trade tensions have the fed in a rate-cutting mood.

Still, if you're a bond investor worried about your allocation, what can you watch over the next few weeks?

The stock market.

That's because a falling market could be a catalyst for a more aggressive Fed policy and a less

aggressive US trade policy.

On the Fed, falling markets can trigger tighter financial conditions,

something the Fed may want to push back on. A larger Fed easing than the 0.25% cut we expect

for September could stoke inflation expectations and help push yields of longer maturity bonds higher.

Falling markets could also help ease U.S. China trade tensions by demonstrating the cost to each country of not cooperating.

Hence, all else equal, we expect weaker stock market performance increases the chances that the

U.S. and China could find some way to get back to the negotiating table and perhaps even delay

tariffs set to take effect on September 1st. While it's certainly not our base case that such an event

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