It’s no secret that bond yields are heavily impacted by inflation and inflation expectations. Moreover, oil prices have a high correlation with inflation. So, to answer why bond yields are rising recently, it’s helpful to check the oil price. Since May 2023, as we share below, crude oil prices and ten-year UST yields have been tracking each other closely. But, you will see that oil tends to lead bond yields when the trends change. The lower graph shows the running 1-year correlation of oil and bond yields on a long-term basis. While there is a long-term positive relationship, it does vary significantly over time.
Crude has fallen rapidly in the last week as it appears Israel will not target Iranian oil facilities. With the relatively sharp decline lower, oil is again approaching significant support at $67 a barrel. A break below $67 could lead oil toward $60 or lower. Thus far, yields haven’t followed the decline. Is the highly tight correlation breaking? Or are bond yields waiting a couple of weeks, as they have in the past, before following crude oil prices lower?
What To Watch Today
Earnings
Economy
Market Trading Update
The Week Ahead
Corporate earnings will make the headlines this week, as there is little economic data. Many large and small companies report, including Google on Tuesday, Tesla on Wednesday, and Amazon on Thursday. As we wrote in this past weekend’s Newsletter, earnings expectations have come down significantly over the last month. Accordingly, the odds are that most companies beat expectations. However, forward guidance often plays a more significant role than actual earnings and revenues regarding the stock’s immediate performance.
Bastiat And The Broken Window
Recent events, particularly the devastation caused by Hurricanes Helene and Milton in 2024, provide a clear example of why destruction does not create long-term economic prosperity. Despite the short-term boost in economic activity from rebuilding efforts, the broader economic implications are far more detrimental. In this post, we will delve into Bastiat’s Broken Window Theory, apply it to the aftermath of the hurricanes, and explain why destruction and the need to replace lost goods drag forward future consumption rather than create new economic value.
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2024/10/21