- Oil, not just the Fed, may be driving Treasury yields in today's market, an economist says.
- A $1 move in oil has historically tracked a roughly 2-basis-point move in the 10-year Treasury yield.
- Rising Treasury yields can ripple through mortgages, loans, and stock valuations.
Investors worried about rising bond yields may want to spend less time watching the Federal Reserve and more time watching oil prices, according to an economist.
The recent sell-off in US government bonds has become closely tied to swings in crude oil prices as the war in Iran fuels fears that inflation could remain elevated, according to GlobalData. TS Lombard chief US economist Steven Blitz.
Early Thursday, the benchmark 10-year US Treasury yield was trading above 5.1%, having hit its highest level since the Global Financial Crisis a day earlier.
That followed a weekslong bond sell-off fueled by persistent inflation, rising oil prices, heavy government borrowing, and growing competition for capital.
"In this moment, the 10-year is a bet on oil prices," Blitz wrote in a note published on Wednesday.
Treasury yields are typically driven by expectations for Federal Reserve policy, inflation, and the broader economic outlook. However, oil has become the more important market to watch, he added.
International Brent crude futures have climbed about 40% since the US-Iran war began, raising concerns that higher energy prices could keep inflation elevated and prompting investors to demand higher yields on long-term government debt.
Since 2012, every $1 move in West Texas Intermediate crude has been associated with nearly a 2-basis-point move in the 10-year Treasury yield, according to Blitz's analysis.
"Short-term, it is a trade, not an investment," he wrote, referring to the 10-year Treasury.
The pressure isn't limited to the US.
Investors are also watching Japan, where government bond yields have climbed to their highest levels in decades as the Bank of Japan unwinds years of ultra-loose monetary policy, making Japanese government debt a more attractive alternative for domestic investors, who have long been among the biggest overseas buyers of US Treasurys.
On Thursday, Japan's benchmark 10-year government bond yield traded at its highest level in three decades, underscoring the global rise in government borrowing costs.
Higher Treasury yields matter well beyond Wall Street. They help determine mortgage rates, auto loans, credit-card interest, and borrowing costs for businesses.
They can also pressure stock valuations by offering investors a higher return on relatively safe government debt.
Even so, Blitz doesn't think today's yields are attractive enough.
For investors with a one-year horizon, Blitz argues rolling short-term Treasury bills may be a better bet if the Fed continues raising interest rates.
He is also skeptical that 5% Treasury yields fully compensate investors for locking up money over the next decade.
"A 5% yield on the 10-year is on the cusp of being attractive, but it is still under-pricing the inherent risks — namely rising inflation — and not yet good enough to fully compete against the array of potential equity market returns in the next 10 years," he wrote.
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