Faster and more synchronised world growth is bad news for bond markets. But the prospect of accelerating growth in Europe and a slowing US economy next year points to the outperformance of US bonds vis-à-vis the EU.
Current yields make US treasuries look more attractive than those in Europe or Japan - especially at the two-year to five-year maturities. US 10-year yields may spike up over the next two or three months in anticipation of further interest rate hikes by the Federal Reserve. Thereafter, however, treasuries will rally - the supply of federal debt is set to decline sharply over the next three years as the US heads for sustained budget surpluses.
One way or another, US growth is set to slow - in direct contrast to the European economy. Most likely, it will be a pretty hard landing in which the Fed raises rates by another 75 to 100 basis points to curb excess demand. The negative wealth effect of a big equity market correction would then slow the economy rapidly over the next year. If that's right, US treasury yields will spike higher in the short term.