Rising Energy Costs Felt in Treasuries as Yields Sync With Oil

(Bloomberg) -- Add rising oil prices, and energy costs more broadly, to the factors driving up Treasury yields. 

The link between West Texas Intermediate crude and 10-year yields is at the highest in more than a year, as measured in the 120-day correlation. As a major input into the global economy, higher prices of the materials that keep the world’s engine spinning mean inflation is unlikely to abate, and that suggests higher nominal rates.

The global energy crunch saw Brent crude touch above $80 a barrel, and on course for its best month since February. European natural gas, carbon permits and power rose to fresh records Tuesday, with little sign of the rally slowing. Of course, taper-talk is a major driver of bond prices. But the Federal Reserve would like to stay its hand as long as inflation allows it to do so. Higher fuel costs are among the reasons they can’t stand pat for too long.

The yield is above 1.5%, its highest level since June and WTI is trading at its highest level since October 2018, as demand runs ahead of supply. 

With prices near a three-year high and U.S. stockpiles shrinking toward a three-year low, the Organization of the Petroleum Exporting Countries and its allies now has more room to maneuver. The alliance could up the pace its adding barrels from the current rate of 400,000/bpd each month. It’s likely to face a chorus of calls to do so. The coalition led by Saudi Arabia and Russia next meets Oct. 4.

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