Bond markets continue to outperform other asset classes in 2014. This confounds the predictions of many asset allocators at the beginning of the year and presents a puzzle. One reason asset allocators were so bearish of bonds was that they believed that central banks would be withdrawing monetary stimulus in 2014 as economies improved, and basically this is what has happened. There is no evidence that the recovery is faltering and the Federal Reserve in the US and the Bank of England in the UK continue to debate when interest rates should start rising. So why are bonds performing so well if monetary stimulus is being withdrawn? The answer to this conundrum lies in Europe. Here, the recovery, which was weak in the first place, is faltering and most of the green shoots are withering. Euroland GDP was €7.91tr in March 2008; it fell to €7.46tr in June 2009 as a result of the Great Recession; climbed to €7.76tr in September 2011 following the initial recovery but then fell back to €7.65tr in March 2013 after the euro crisis. Since then it has crept back to €7.72tr a rise of 0.9%. Inflation is minimal which means that nominal GDP is scarcely growing. Given this scenario, it is little wonder that the yield on 10-year Bunds has fallen below 1%. The problem for the rest of the Eurozone is that their real yields are higher than those in Germany given the yield premiums that investors demand (even after the substantial fall in such premiums since the euro crisis two years ago). These real yields exacerbate the already substantial deflationary forces in Europe. It is instructive to note that the yield curves in Europe have flattened considerably compared to those in the US and the UK, indicating the threat to growth. Mr Draghi talked about the need to loosen fiscal policy at Jackson Hole but it is unlikely that the German authorities who control the purse strings are listening.