Oil prices and bond yields continue to push higher in European trading today, offering a timely reminder to broader markets that inflation risks remain very much in focus.
Brent crude is up over 1% to above $102, while WTI crude now up 1.5% to $97.50 as Middle East tensions continue to keep supply disruptions in focus.
At the same time, US Treasury yields are climbing, with 10-year yields up 3 bps to 4.867% – its highest level since 2023. The US Treasury may have announced a $6 billion bond buyback overnight, but that is not enough to keep the bond vigilantes at bay. The 5% mark is firmly in traders’ crosshair, with the US CPI report adding another potential catalyst.
The pain point for markets now is that as oil prices continue to track higher, it is a relatively straightforward equation in pushing up inflation pressures and wider inflation expectations.
Higher energy prices will eventually feed through into transportation, production, and consumer costs. In turn, investors are also demanding higher bond yields as they reassess how much room central banks have to keep monetary policy setting as it is – especially the Fed.
And while $100 oil itself is already making waves across markets, the real trouble is that persistently higher energy prices could lead to a bigger set of problems down the road.
At this juncture, oil is not the only concern for the bond market and central banks.
Worries over the massive US deficit, heavy government borrowing, and the now disappointment around the Treasury’s $6 billion bond buyback are keeping pressure on the long-end of the curve. It is leaving markets with an uncomfortable combination to deal with, that being higher energy costs and also higher borrowing costs at the same time.
Well, the moves we’re seeing today definitely serve as a timely warning ahead of the US CPI report tomorrow. And that is major central banks are going to find it increasingly more difficult to keep ignoring the signal – not just from the oil market, but from the bond market as well.
This article was written by Justin Low at investinglive.com.