In U.S. Treasuries, Oil Is King

Bloomberg data reveals close correlation between bond yields and crude oil prices.

Don’t be fooled by the noise around falling German bonds or the latest U.S. economic data point. When it comes to trading 30-year Treasuries, what really matters these days is oil.

During the past four months, yields on U.S. Treasury notes have been the most correlated to crude prices in almost two years, according to data compiled by Bloomberg.

Oil has climbed 36 percent from this year’s low of $43.46 a barrel on March 17 as energy companies cut production and signs emerged that Europe’s stimulus efforts are, in fact, starting to help on the growth front. In that period, yields on long-dated U.S. government bonds have surged to 2.92 percent from 2.61 percent.

When oil prices were plummeting, “it was the huge pause button” for bond traders who wanted to short 30-year debt, said Jim Vogel, an interest-rate strategist at FTN Financial. Now that crude has been rebounding for a bit, the market’s “beginning to build a short base again,” he said.

Speculative investors using borrowed funds to boost returns—often called leveraged accounts—are now short 30-year bond futures, reversing a long bias that started in February and lasted through most of March, data from the Commodity Futures Trading Commission (CFTC) show.

The tie to oil is adding yet another complication to a pretty convoluted bond market right now where central bank stimulus—or talk of withdrawing it—can send prices lurching in one direction or another.

In this world where the European Central Bank’s bond-buying has pushed yields on some of the region’s debt below zero and the Federal Reserve is planning its first interest-rate increase since 2006, long-bond traders are watching oil as carefully as anything.

Of course, there’s a strong link between oil, inflation, and (thus) monetary policy, but crude prices haven’t always been so front-of-mind for debt traders.

Oil’s 59 percent drop in nine months paralyzed bond bears who were already shell-shocked by a surprise rally in debt. Now that crude is picking up, they’re coming out of the woodwork again.


--With assistance from Liz Capo McCormick in New York.

About the Author

Lisa Abramowicz

Lisa Abramowicz

Lisa Abramowicz is a Bloomberg Gadfly columnist covering the debt markets.

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