FT data shows that the three-month rolling correlation coefficient between WTI crude oil and the US 10-year Treasury yield is approximately +65%, reaching its highest level in 35 years, only slightly lower than the record of approximately 66% during the first Gulf War in 1990. In other words, in recent months, the 10-year yield has tended to rise along with oil prices and fall with oil prices.
The primary reason is the consistent logic between energy inflation and central bank interest rate hikes. A deteriorating situation in the Middle East means higher oil prices, increasing the risk of a renewed rise in US inflation. The market accordingly lowers its expectations for future interest rate cuts and even shifts to anticipating rate hikes, pushing up real interest rates and term premiums, ultimately leading to an increase in the 10-year US Treasury yield.
Because of this, oil prices have become a real-time indicator of the escalation of the US-Iran conflict. Any bad news regarding the Hormuz leads to a rise in oil prices; simultaneously, the market worries about inflation, fiscal subsidy pressures, economic costs, and the Federal Reserve having to maintain higher interest rates. Therefore, oil and bonds are essentially trading the same geopolitical shock. The FT points out that some bond investors are now even more focused on energy prices than traditional economic data.
Under normal circumstances, rising oil prices could indicate either strong economic demand or a supply shock. If oil prices rise too sharply and ultimately dampen economic growth, long-term US Treasury yields may actually decline. Therefore, historically, oil prices and 10-year Treasury yields have not maintained such a high positive correlation for extended periods.
