Tuesday, February 4, 2014

Market correlations shift back to risk-on/off pattern

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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