Oil and Treasury yields haven't moved this closely in seven years. That's bad news for markets

Oil and U.S. Treasury yields correlation: WTI, Brent, 10-year yield Oil prices and Treasury yields are moving in a tight lockstep, compounding the pressure on markets as investors grapple with worries over higher inflation. The one-month rolling correlation between front-month West Texas Intermediate crude and the 10-year Treasury yield has climbed to 0.96, according to BMO Capital Markets. That's the strongest positive relationship since June 2019, and before that October 2014. The synchronized moves come as oil prices have surged due to the conflict in the Middle East, with the benchmark 10-year Treasury yield briefly topping 5% Monday for the first time since October 2023. The exceedingly tight relationship means another leg higher in oil could increasingly reverberate across financial markets through higher inflation expectations, elevated Treasury yields and steep borrowing costs, while potentially keeping the Federal Reserve monetary policy tighter for longer, said industry veterans. Stock Chart Icon Stock chart icon Year-to-date gains performance U.S. 10 year Treasury yield and U.S. oil prices The main impact is that an oil shock now transmits more directly into financial conditions, said Billy Leung, investment strategist at Global X ETFs. Higher crude can lift inflation expectations, delay Fed easing and raise the discount rate applied across equities and credit at the same time. That makes energy headlines more consequential for broader markets and reduces some of the diversification investors would normally expect between commodities and government bonds, he added. The implications stretch across asset classes. Higher Treasury yields reduce the relative appeal of equities as they raise financing costs for businesses, while expensive oil squeezes margins for companies dependent on energy and transportation. Growth and technology stocks can be particularly exposed because their valuations depend heavily on earnings expected far into the future. A bond bear market? Ed Yardeni, president of Yardeni Research, said the chain increasingly runs from energy through inflation and bonds into monetary policy and equities. It's certainly bad news that if oil prices continue to move higher, that would indicate that bond yields are moving higher, and then higher inflationary expectations raise the odds that we'll be in a tightening cycle when it comes to the Fed funds rate, Yardeni said. Not one and done, but there there could be two or three rate hikes up ahead here, and that in turn can certainly be unsettling for the stock market. Komal Sri-Kumar, president of Sri-Kumar Global Strategies, is already steering investors away from assets most vulnerable to higher rates. He favors short-duration fixed income and defensive equities, while recommending physical assets including real estate, copper and gold as hedges. He said technology growth stocks are more vulnerable as interest rates remain elevated. watch now VIDEO 4:10 04:10 Investors caught between yields, oil and Trump Squawk Box Europe You're going to have a bond bear market, the yields headed up, and I don't see anything that stops the upward march of oil and natural gas prices either, said Sri-Kumar. Consumers face a similar double hit. Higher energy prices feed directly into gasoline costs and indirectly into goods and services transported by truck and rail, while rising Treasury...