Treasury market trading like oil market, economist says

The US Treasury market is currently trading in a manner more akin to the oil market, with crude oil prices becoming a significant driver of Treasury yields, according to Steven Blitz, chief US economist at TS Lombard. This shift is attributed to concerns that the conflict in the Middle East is fueling inflation, prompting investors to demand higher yields on long-term government debt.

Blitz noted that the recent sell-off in US government bonds has become closely tied to swings in crude oil prices. He advised investors worried about rising bond yields to focus more on oil prices than on the Federal Reserve's policy. He stated that "In this moment, the 10-year is a bet on oil prices."

International Brent crude futures have climbed approximately 40% since the US-Iran conflict began, raising fears that elevated energy prices could sustain inflation. This situation leads investors to demand higher yields on long-term government debt. Blitz's analysis indicates that since 2012, every $1 increase in West Texas Intermediate crude has corresponded to nearly a 2-basis-point move in the 10-year Treasury yield.

The pressure on government bond yields is not confined to the US. Japan's government bond yields have also surged to multi-decade highs as the Bank of Japan begins to unwind its long-standing ultra-loose monetary policy. This makes Japanese government debt more appealing to domestic investors, who have historically been major buyers of US Treasurys.

Higher Treasury yields have broad implications, influencing mortgage rates, auto loans, credit card interest, and corporate borrowing costs. They can also pressure stock valuations by offering a more attractive return on relatively safe government debt. However, Blitz believes current yields are not yet sufficiently attractive, suggesting that rolling short-term Treasury bills might be a better strategy for investors with a one-year horizon if the Fed continues to raise interest rates. He remains skeptical that a 5% yield on the 10-year Treasury adequately compensates investors for locking up their money for a decade, given the risks of rising inflation and potential equity market returns.