Oil at $100 Pushes Up U.S. Treasury Yields...10-Year Yield Breaks Above 5%, Highest in 19 Years

【Financial News, New York — Reporter Lee Byung-chul】  The 10-year U.S. Treasury yield broke above 5% for the first time in 19 years as international oil prices surged amid the war with Iran. Expectations that the Federal Reserve System (Fed) will raise its benchmark interest rate on the 16th, local time, have added to the sharp rise in long-term U.S. market yields.
In the U.S. Treasury market on the 15th, the benchmark 10-year yield rose as high as 5.041% during the session. It was the highest level in 19 years, since July 2007. Although it later gave back some of its gains, it was trading around 4.99% as of noon Eastern Time. The 30-year yield also climbed to 5.401% intraday, its highest level since June 2007, before trading around 5.37%. The two-year yield, which is sensitive to Fed monetary policy, rose as high as 4.688% during the session.
The direct cause of the sharp rise in Treasury yields was oil prices. As the conflict between Iran and the United States has dragged on and the Strait of Hormuz has effectively been blocked, West Texas Intermediate crude oil (WTI) has surged well above $100 per barrel. Concerns that higher energy prices will rekindle inflation have led to Treasury selling.
Oil prices and Treasury yields have recently moved almost in lockstep. According to BMO Capital Markets, the one-month rolling correlation between front-month WTI and the U.S. 10-year Treasury yield has climbed as high as 0.96. A correlation coefficient closer to 1 means that the two indicators are moving in the same direction.
Steve Sosnick, chief strategist at Interactive Brokers, said, "As long as oil prices remain elevated and continue to rise, they will put additional upward pressure on yields."
Markets are also treating the possibility of a Fed rate hike as virtually certain. According to the CME FedWatch Tool, markets are pricing in a more than 92% probability that the Federal Open Market Committee (FOMC) will raise the benchmark interest rate by 0.25 percentage points at its upcoming meeting. August inflation remains well above the Fed's 2% target.


[email protected] Reporter Lee Byung-chul Reporter