Oil and Treasury Yields Are Moving Together Like It Is 1990

Oil and Treasury Yields Are Moving Together Like It Is 1990

The three-month rolling correlation between oil and the US 10-year Treasury yield has climbed to about 65%, the highest since 1990 and just short of the 66% set when the first Gulf War began.

What the number really describes is which kind of news the market thinks oil is. When oil rises because demand is strong, yields rising alongside it is ordinary and says the economy is hot. This time oil has been pushed up by blocked supply, and Treasuries are selling off with it. For a portfolio holding both stocks and bonds that distinction matters, because one event is now pressing on both sides and the half meant to spread the risk stops doing its job.

Duration is the thing to keep in mind. The 1990 episode lasted only a few months and unwound once the supply problem eased. This correlation reflects where today's news is coming from rather than a change in how the two assets relate, and if Middle East tensions loosen they will probably go their separate ways again. A second measure points the same way: BMO Capital Markets puts the one-month rolling correlation at 0.96, the strongest since June 2019, and readings that extreme rarely last.

Source: Cboe and BMO Capital Markets (Image: @dailychartbook)