SSGA: Yields have stopped following oil’s lead
The usual link between oil prices and the 10Y yield has broken. Falling oil, which should lower yields, is not doing so. Investors are not flocking to Treasuries either, raising doubts about traditional safe havens amid deep US policy uncertainty.
In uncertain times we see trusty relationships deteriorate as new worries take precedent. One of these relationships has been the 10-year yield and the price of oil. Similar to the divergence between the 10Y yield and the dollar, this relationship has changed course recently.
The price of oil typically ebbs and flows with the outlook for economic growth. Good times mean various sorts of economic activity picks up, increasing the demand for oil. Conversely, a cloudy outlook means negative implications for crude demand (think less consumption of travel, and factories running at lower capacity).
Typically a negative backdrop sends investors to safe haven assets such as US Treasuries, boosting demand and price as yields fall. However, the uncertain outlook has not resulted in a rush to treasuries, posing questions around what truly is viewed as a safe haven in times when US policy uncertainty is at historical heights.
Another important piece of the relationship is the disinflationary impact of lower oil prices. As oil prices fall, this acts as a disinflationary tailwind, pressuring yields downward. However, we have not seen yields follow suit.
