Oil Prices and US Treasury Yields Show Strongest Correlation in 6 Years

Oil prices and US Treasury yields are moving in the same direction more strongly than at any time in six years. Over the past month, the correlation between West Texas Intermediate (WTI) crude prices and US 10-year Treasury yields has climbed to 0.96, the highest level since June 2019. The surge in oil prices driven by the Middle East conflict has created a landscape in which the two indicators move together.

The US 10-year Treasury yield briefly rose to 5.041% on the day, marking its highest level since July 2007. Growing expectations that the Federal Reserve will raise its benchmark rate at the September FOMC meeting also contributed to the rise in yields.

"The biggest impact is that oil shocks are transmitted more directly into financial conditions," said Billy Leung, investment strategist at Global X ETFs. "Rising oil prices lift expected inflation, delaying the Fed's monetary easing, while also raising the discount rates applied across stocks and corporate bonds." Ed Yardeni, president of Yardeni Research, analyzed, "If oil prices keep rising, that means bond yields will keep rising as well, which is clearly a negative." He added, "There could be two or three more rate hikes." Komal Sri-Kumar, president of Sri-Kumar Global Strategies, said, "We will see a bond bear market and yields rising," adding, "There is nothing in sight to stop the upward trajectory of oil and natural gas prices." He has been advising investors to avoid assets that are vulnerable to rising interest rates.

Borrowing costs for consumers and businesses are rising. "Rising WTI prices and rising Treasury yields are both bad news for consumers," said Andy Lipow, president of Lipow Oil Associates. Lipow explained that higher funding costs due to rising Treasury yields could weigh on capital-intensive projects such as building artificial intelligence (AI) infrastructure.

Strategist Leung noted that the correlation could quickly weaken if geopolitical tensions ease or concerns about an economic slowdown emerge as the dominant variable. Lipow also pointed out that the high correlation coefficient reflects the relatively short period since the outbreak of the Middle East war.