Source: Bloomberg

The chart shows the correlation of the JP Morgan Emerging Markets Currency Index vs. the inflation and real components of the 10-year US Treasury yield. Not surprisingly EM currencies like inflation (many are big dollar debtors and commodity exporters) and don’t like rising real yields. The correlation is positive for the inflation component of yields and negative for the real component. Commodity plays like Brazil are the most vulnerable when real yields rise. Brazil has been a stunning performer over the past year; the Brazil ETF has returned 52% over the past 12 months with reinvested dividends. That is looking a bit old. Some brokerage houses (including Goldman Sachs) point to Turkey’s large dollar debt as a source of vulnerability in a rising yield environment. Turkey’s ETF was the worst performer in the ETF universe, down more than 3% at the New York opening on a sharp fall in the Turkish lira. Asian equities are less vulnerable to a rising dollar; they are less indebted and in many cases less dependent on commodity exports.