Oil, The Dollar and Treasury Yields Are Linking Up. That’s a Red Flag

(Bloomberg) -- Simultaneous, positive correlations between crude oil, the U.S. dollar and Treasury yields are rare, and not an optimistic sign.

Demand for the dollar is waning as investors pull funds from U.S. equities on fears the coronavirus will hit growth. Oil has tumbled as a full-blown price war between Russia and Saudi Arabia heats up.

Falling Treasury yields complete the picture. While investors aren’t buying stocks because they’re afraid of a slowdown, they don’t want to take their money out of the U.S., so they’re parking their cash in government bonds and pushing yields to record lows.

These charts show how traditional relationships between the three are being turned on their head by the coronavirus and oil’s collapse:

Brent crude and the dollar are now dropping together, breaking their negative correlation and showing the strongest positive relationship on record.

Oil’s relationship with U.S. Treasury yields, which has swung in either direction over the years, has turned the most positive since 1988.

The dollar and Treasury yields are the most correlated on record, in contrast with the pattern in 2018 when falling yields coincided with a stronger currency.

An Emerging-market Footnote:

For developing-nation equities, oil’s positive correlation with the dollar and Treasury yields brings the third installment in a saga of frustration.

• Donald Trump’s tariff escalation against Chinese goods two years ago interrupted a two-year, $8.3 trillion rally in emerging-market stocks
• Just as they looked to rebound on the strength of the phase-one deal between the U.S. and China, the coronavirus epidemic took the wind out of their sails
• And before the markets could price in the full impact of the virus, the standoff between Russia and Saudi Arabia over oil-production limits has brought a new risk

Now, emerging markets may have to wait until investors are ready to take money out of U.S. Treasuries. It could happen when U.S. growth expectations return or when yields fall so low that developing nations become too tempting to ignore.

To contact the reporter on this story: Srinivasan Sivabalan in London at ssivabalan@bloomberg.net

To contact the editors responsible for this story: Alex Nicholson at anicholson6@bloomberg.net, Robert Brand

©2020 Bloomberg L.P.