Two of this week’s main market highlights were the continued oil prices rally – with Brent touching above $70 a barrel on Thursday for the first time since December 2014 – and a sell-off of US Treasury bonds in the middle of the week.
The US Government bond sell-off pushed yields on the benchmark ten-year Treasury bonds to a ten-month high at above 2.5%, reports https://oilprice.com/. Generally, yields on Treasury notes go upwhen there’s less demand for them, and go down when demand is high.
While a number of factors have combined to push U.S. government yields higher, analysts suggest that the main reason for this is the oil price rally.
“We would argue that an ongoing rise in oil prices provides an important explanatory factor as regards the rise in long-end yields this week and in recent months,” a team of Rabobank strategists led by Richard McGuire wrote in a note on Wednesday, as carried by Bloomberg.
The oil price gains have also increased expectations of inflation and rate rises this year, which is the primary cause of the US bond sell-off, according to Rabobank.
The ten-year breakeven inflation rate—a measure of expected inflation in the next ten years derived from 10-Year Treasury Constant Maturity Securities—moved above 2% this week, for the first time since March 2017. Much of that upward move can be attributed to the rising price of oil, Goldman Sachs’ co-head of global macro markets research, Francesco Garzarelli, told CNBC this week.
According to Deutsche Bank, the oil price rally has lifted inflation expectations, but the bond sell-off is unlikely to continue unless core consumer prices rise more than expected.
“When oil goes up inflationary expectations go up as well, even if they are long-term inflationary pressures,” Andres Garcia, CEO at Zoefin.com, told The Street this week, discussing the inflationary pressures.
The Fed now has to figure out whether this is inflationary pressure coming just from oil prices, or whether there are more long-term trends at play such as increased industrial capacity and a tight labour market, Garcia said.