How Oil Prices Are Linked to Bond Yields?

Oil prices and U.S. Treasury yields are exhibiting their strongest correlation since 1990, signaling that developments in the Middle East conflict are increasingly influencing global bond markets.

According to Cboe data on derivatives contracts, as reported by the Financial Times, the correlation between West Texas Intermediate crude oil prices and 10-year U.S. Treasury yields reached approximately 65% in September, nearing the record high of 66% recorded in 1990.

Calculations by TS Lombard analysts indicate that every $1 increase in WTI crude oil prices is associated with a rise of about 0.02 percentage points in 10-year U.S. Treasury yields.

Mike Riddle, fund manager at Fidelity International, stated that bond investors have effectively become “oil market traders” over the past three to six months. Previously focused more on economic data and central bank decisions, investors have had their calculations reshaped by sharp oil price volatility since the outbreak of the Middle East conflict, leading them to closely monitor energy markets for their implications on inflation and monetary policy.

This correlation has also extended to European bond markets, where yields on bonds of countries most exposed to energy shock impacts rose in tandem with increasing oil prices.

In this context, Peter Shaw, global macro strategist at RBC Capital Markets, noted that energy prices have become a more prominent driver of central bank policy this year.

This growing correlation underscores the importance of the Strait of Hormuz to global markets, as approximately 20% of global oil exports typically pass through it. Any disruption to navigation in the strait raises concerns about energy supplies, inflation, and interest rates.