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Market correlations shift back to risk-on/off pattern – Sober Look

This is a syndicated repost published with the permission of Sober Look. To view original, click here. Opinions herein are not those of the Wall Street Examiner or Lee Adler. Reposting does not imply endorsement. The information presented is for educational or entertainment purposes and is not individual investment advice.

The chart below compares the performance of long-term treasuries (TLO) to emerging market bonds (EMB) over the past year.

Source: Ycharts

The relationship between US rates and emerging market assets (particularly bonds and currencies) has shifted. Last year both were responding the big unknown of the Fed’s tapering of QE3 – and moving roughly in the same direction. Now that taper is a reality and we have some certainty around the magnitude of the reductions in the near-term, the correlation has reversed. The current environment is once again based on risk-on/risk-off dynamics as was the case during the Eurozone crisis. Risk-on pushes prices of treasuries higher and emerging market assets lower. This trend that was quite visible yesterday, with a partial reversal taking place today (chart below compares Brazil vs. US rates in recent weeks).

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