This morning, bonds have rallied yet again putting 10yr rates right at the edge of where we become extremely worried about the direction of not just growth but a new phase in the deflationary backdrop that has central banks in the developed world very concerned.

US TreasuryWatch for a break of 2.50% on the 10yr as a key level that has held through multiple tests in the last years. Over the last week, despite decent macro data and no guided change in policy by CBs, rates have plunged 15bps.

For Emerging Market investors, we often view the 5yr part of the curve as the ultimate expression of global growth. We like to see 5yr rates in the U.S. Treasury market to be moving higher.

While we are more constructive on global growth than many market players, we acknowledge the trend on rates is disturbing and creating some headwinds for the next move higher in Emerging Markets.  Key growth metrics are being questioned, and we continue to hedge up our portfolio using tools like Russell 2000 (IWM, quote) and South Korea (EWY, quote) ETFs to be owning downside protection in indices that are most responsive to changes in global growth.

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