U.S. Treasury yields often move in tandem with the price of oil, but this relationship has broken down in recent weeks, suggesting that the near-term inflation outlook has taken a back seat to long-term deficit fears in the bond market.
Falling oil prices – especially negative year-on-year price moves – are usually disinflationary. And year-on-year crude oil prices have been negative since mid-July, nearing -30% in September. This would typically be a bullish signal for Treasuries, as lower inflation increases the likelihood that rates will fall across the yield curve.
Yet yields and oil have diverged sharply. Since the Federal Reserve’s jumbo 50 basis point rate cut on Sept. 18, the 10-year Treasury yield has spiked by almost 70 basis points – a historically large shift – even as the price of oil has fallen.
Monday’s price movements were particularly noteworthy. Crude slumped 6%, while the 10-year yield leapt 5 bps to hit…
