Government bonds decouple, but for how long?

The 10-year US Treasury yield increased even further in July despite reassurances from Fed officials that US monetary policy is likely to remain highly accommodative for a long time. By contrast, the yields of 10-year German Bunds and UK Gilts fell back a little, aided by the actual (ECB) and seemingly imminent (UK MPC) adoption of forward guidance. Although we expect further underperformance from Treasuries in coming years, history suggests that we will not see a complete decoupling in the performances of US and European government bonds despite subtle variations in the outlooks for monetary policy in the US and Europe.