Tuesday, October 25, 2011

Treasuries up, oil up?


This chart compares the yield on 10-yr Treasuries to the price of crude oil futures contracts. The two have been moving in tandem (correlation 0.92) for awhile now, but today's action caught my attention: crude is up sharply, while yields are down (and bond prices are up). That the two should move together makes sense, since both have been driven of late by perceptions of the economy's strength: a weaker economy calls for lower yields and less demand for oil, and thus a lower oil price. What to make of the opposite moves today? I'm tempted to think that Treasury yields today have zigged when they should have zagged.

9 comments:

Unknown said...

The price action in crude the past 2 days has everything to do with narrowing Brent-WTI spreads, and little else. Check out today's Brent price before getting excited. The death of Ghadaffi is going to cause the two prices to converge again (Arab spring saw them widen substantially), and since the US economy is perceived to be stronger than Europe, this gives the markets a reason to raise the US price more than they're lowering the European (Brent) price.

PerformanceSpeaksForItself said...

Scott, I've been looking at that too...the only thing I can think is the spread between WTI and Brent is closing, but why? - does someone know something about oil storage in, or new transit from, Cushing? Maybe price movement after oil inventories tomorrow will give a clue as to whether its the former. Your thoughts?
Unknown: why would Gadaffi's death cause the spread to narrow by WTI rising, and not Brent falling? Wouldn't supply easing and lower demand from a declining Euro economy suggest that Brent should be falling and not WTI rising?

Unknown said...

^
As I said above, the perceived relative strength of the US economy compared to Europe is grounds enough for the market to bid up the price of WTI (which is what most oil in the US is priced in) while keeping Brent stable or slightly declining, instead of keeping WTI stable and making the price of Brent do all the work by falling dramatically.

Unknown said...

^
And BTW, if my readings of the tea leaves are right, you're really going to see this in action on Thursday.

Benjamin said...

If you get old enough...all the young girls look so nice all the time.

If you get old enough...interest rates seem too low.

But this may be the new norm. Too much capital, yet savings rate rise due to the need for economic security, and Asian cultural patterns.

Japan showed that interest rates can go down, then down some more, then lay down for 20 years. And counting.

UFormula said...

It's called QE3.

Dr William J McKibbin said...

"A glitch in the Matrix. It happens when they change something."

marmico said...

The WTI-Brent spread. Apparently, the economic law of one price is not in operation in the oil market.

So what's happening on Thursday, Unknown?

It seems to me that the closing of the spread uptrend is just a market reaction to Saudi succession. The U.S. must still be the marginal oil importer.

Dr William J McKibbin said...

With European banks balking at taking haircuts on sovereign debt issues, that leaves only monetary expansion -- the EU will create a "super fund" that will be comprised of "new" money freshly printed by the EU itself -- the US will follow suit -- the great inflation is about to begin...