Having wreaked havoc and destruction in Europe's debt markets on two separate occasions this year, it appears that the bond vigilantes are changing their focus to the US bond market. Treasury yields have surged in the past couple of weeks, the 10yr note yield up 50bp since the start of the month and by 85bp since the Fed implemented QE2.

As always, there are a myriad of potential factors which have contributed to this sudden surge in yields. Some investors fear that the profligate fiscal policy being run by the US Government (underlined by the latest generous tax deal between the White House and Congressional Republican leaders) combined with the Fed's policy of printing money will continue to debase the currency and ultimately result in higher inflation.

Notwithstanding the weakness conveyed by the last set of payrolls figures, for the most part the US economy has shown signs of definite improvement over the past couple of months, which has reduced expectations for additional asset purchases after QE2 expires next June. Contributing to the bond market sell-off has been some very aggressive asset allocation shifts out of fixed income into equities - the S&P for instance achieved a 27m high on Friday.

Also weighing on fixed income has been very heavy corporate issuance - with confidence amongst European investors severely shaken by their debt crisis, many issuers have decided to obtain funding in dollars rather than in the euro. The rise in Treasury yields has been very rapid over recent weeks, but some dispassionate analysis is required before becoming too alarmed. Firstly, the Fed is still fighting a very severe episode of disinflation, with most measures of core inflation currently below 1%. It is not at all clear that they have won this fight. Secondly, at just 3.30%, the ten year Treasury note yield remains very low in historical terms. Thirdly, the yield curve has steepened very significantly in recent weeks, which will doubtless attract some buyers to the longer end before too long.

For those who still think that longer-dated yields will remain relatively low, they should only become concerned if the 10yr yield breaks 4.0% on a sustained basis.

•Proposal to widen EFSF mandate likely to get short shrift from Germany

•Dollar suffers as Moody's express concern about Obama tax package, US AAA rating

•Europe's imposing refunding burden

•UK house prices still in the doldrums

•Japan PM Kan orders 5% cut in corporate tax rate

Moody's expresses concern about Obama's tax package and US AAA rating. Moody's expressed some justifiable concern regarding President Obama's stimulatory tax package, suggesting that it increased the risk that the US AAA credit rating might be put onto negative outlook over the next couple of years. Moody's remarks triggered a significant sell-off in the dollar, although interestingly US Treasury yields were little affected. The EUR, which started the day near 1.32, punched higher consistently all through the London session, eventually reaching 1.34. Cable was volatile - there was some significant selling in the morning session which dragged it down to 1.5720, but it recovered to 1.5870 by late afternoon.

EU Summit preview. Two days ahead of a pivotal EU summit in Brussels, some fresh ideas for responding to Europe's debt crisis are being discussed by Europe's finance officials. With German Chancellor Merkel and French PM Sarkozy scuppering a push by some nations to either increase the size of the EFSF or issue eurozone sovereign bonds, officials have apparently been looking at a proposal to widen the remit of the EFSF. Instead of raising funds in order to participate in sovereigns’ bailouts if required, there is a suggestion that the EFSF's mandate could be expanded to buy the bonds of distressed sovereigns. If this proposal gained acceptance, then presumably it would permit the ECB to back away gently from its bond purchasing program, one that many within the ECB (especially Bundesbank President Axel Weber) have never been keen on (yesterday, it was confirmed that the ECB purchased an additional €2.667bn of eurozone sovereign debt as part of its asset purchases program in the week ended December 10th, a total of €72bn). However, Germany and France may need some convincing on this latest proposal, because it effectively reduces the borrowing costs for the periphery by using the superior credit rating of the former. What is not yet clear is whether the EFSF would be permitted to participate in new issues. If so, then the EFSF may rapidly discover that it had become the main source of refunding for Europe's troubled sovereigns. In this way, with Germany the ultimate guarantor for the EFSF, it would essentially be a form of indirect euro-sovereign issuance. Germany is unlikely to fall into this trap, unless there is very strong conditionality.

Europe's refinancing mountain. A report published by Italy's UniCredit suggests that eurozone sovereigns need to refinance €560bn of debt next year, €45bn above the likely outcome for this year. Separately, the ECB has warned that Europe's banks need to refinance €1trln of debt over the next two years. In the last couple of months, there has been a relatively widespread buyer's strike of European peripheral sovereigns and their banks. To put this refunding task into perspective, annual eurozone GDP is around €9trln.

The pound loses ground. The pound gave back some ground against the euro on Monday, for no particular reason other than the existence of a very large EUR/GBP buy order. From 0.8350 in the morning session, EUR/GBP gradually climbed up to 0.8450. It is possible that Charlie Bean's comments also weighed on sterling - he suggested that more QE may be required if the eurozone debt crisis worsened, as the latter would likely derail the UK economy.

More gloom on UK house prices. Amongst the myriad of UK house price surveys, it is the RICS survey that is amongst the most comprehensive and has the best track record. The latest RICS report continues to convey a fairly sobering message, although there was some improvement - the number of real estate agents and surveyors saying house prices fell exceeded those suggesting house prices had increased by 44 percentage points last month, still a very weak reading but better than October's -49%. Buyers continue to hold off, expecting the economy to weaken next year as fiscal austerity starts to bite. First-time buyers are being adversely affected by a dearth of mortgage finance. Interestingly, the London market experienced a significant improvement in the month, with the house price balance climbing to -32% from -49% in October.

Japan PM Kan orders a 5% reduction in the corporate tax rate. Conscious that the economy is at risk of slipping back into recession, Japanese PM Kan has instructed his ministers to lower the corporate tax rate (currently 40.69%) by five percentage points. This reduction could reduce government revenue by around $20bn in a full fiscal year.