Thursday, October 15, 2009
For most of the past year, there has been a very strong correlation between T-bond yields and crude oil prices, as this Bloomberg study shows. In the past month, however, bond yields have lagged the rise in crude prices. Crude has now reached a new high for the year, while bond yields are 50 bps below their highs for the year, which occurred about four months ago.
On the margin, however, over the past few weeks the modest rise in T-bond yields has been driven almost exclusively by rising inflation concerns; TIPS real yields have been flat while nominal yields have risen, with the result that the breakeven inflation rate has risen. This makes sense, since higher oil prices are quite likely to result in higher consumer price inflation in coming months.
It would appear to me that bond yields have some catching up to do with oil prices.
Full disclosure: I am long TBT at the time of this writing.
Posted by Scott Grannis at 11:36 AM