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