In the US, oil and government bond yields are moving almost in sync
In the United States, oil prices and 10-year government bond yields are moving almost in sync, increasing pressure on financial markets amid a new inflation shock. According to CNBC Top News, the one-month rolling correlation between the front-month WTI oil future and the yield on 10-year US Treasury bonds reached 0.96.
According to BMO Capital Markets, this is the strongest positive relationship between these indicators since June 2019. Before that, a similar level was recorded in October 2014. Oil rose due to the conflict in the Middle East, while the yield on benchmark 10-year US government bonds briefly exceeded 5% on Monday, for the first time since October 2023.
Pressure on inflation and markets
Global X ETFs investment strategist Billy Leung said that the oil shock is now being transmitted more directly into financial conditions. In his view, more expensive oil may raise inflation expectations, delay the Federal Reserve's policy easing, and increase the discount rate for equities and credit instruments.
Higher government bond yields reduce the relative appeal of stocks and raise financing costs for companies. At the same time, expensive oil cuts the margins of businesses dependent on energy and transportation. Technology companies and growth stocks may be particularly vulnerable, as their valuations are largely based on profits expected in the distant future.
More current news is available on the UA.News Telegram channel Telegram.
Risks for consumers and businesses
Yardeni Research President Ed Yardeni suggested that a further rise in oil prices could be accompanied by growing bond yields and inflation expectations. In his view, this increases the likelihood of a Federal Reserve monetary tightening cycle involving two or three rate hikes, which could destabilize the stock market.
Lipow Oil Associates President Andy Lipow said that rising WTI prices and bond yields simultaneously affect consumers negatively. Higher energy prices affect the cost of gasoline, goods, and services, while rising government bond yields are reflected in mortgage and auto loan rates. According to him, financing inventories and investments, including capital-intensive projects in artificial intelligence and energy infrastructure, becomes more expensive for businesses.
At the same time, Leung cautioned that a correlation of 0.96 is unusually high and may weaken quickly if geopolitical tensions decline or concerns about economic growth intensify.
