The relationship between US Treasury bonds and emerging market currencies is diverging from its historical pattern more than at any point in over four years, as rising US bond yields fail to boost the dollar and pressure emerging market currencies as they once did. Bloomberg's US Treasury bond index is on track for a loss this quarter, following investor selling of long-dated bonds amid concerns over the direction of US government debt. Meanwhile, MSCI's emerging market currency index is heading for its biggest quarterly gain in over a year, pushing the correlation between the two assets to its most negative level since the first quarter of 2022. This bout of US Treasury selling is not solely driven by expectations of tighter Federal Reserve policy, but rather by worries about US government debt and budget deficits, leading to what the market calls the 'Dollar Debasement Trade'—investing on the assumption that the dollar's real value is likely to be eroded. As a result, currencies of commodity-exporting emerging market countries, particularly South Africa, Colombia, and Chile, have strengthened the most this month. Nick Rees, head of macro research at Monex Europe, noted that the Dollar Debasement trend makes emerging markets and commodities more attractive, and if concerns continue to grow, it would be a positive factor for currencies of commodity-exporting countries broadly. This phenomenon reflects that the old equation of 'high US yields = strong dollar = weak EM currencies' may no longer hold as it once did.
Rising US Treasury yields due to debt concerns, not Fed policy, weaken bond prices.
