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Crude Oil Leads Bond Yields

Chart In Focus
May 21, 2015

What if I told you I could draw you a picture ahead of time for what the future of interest rate movements would look like?  That would be a cool trick, no doubt.  But that’s exactly what crude oil prices can do for us.

This relationship is part of a category of relationships that I refer to as “Liquidity Wave” phenomena.  The idea is that a price pattern which appears in one dataset can reliably show up later in another.  So if you see something happen in the leading data, you can anticipate that it will happen in the lagging item.  

This week’s example shows how crude oil futures prices tend to lead T-Bond interest rates by about 3 weeks.  It is not a perfect correlation, just a very good one.  Crude oil prices have rebounded from a low in the $40s, and after a lag we have seen the same rebound occurring in the Treasury Yield Index (TYX).  Crude oil prices have leveled out over the past 3 weeks, and so now we can expect a similar response in interest rates. 

Lest you think that this is a spurious relationship, here is a longer term chart dating back to the beginning of 2013, showing that it works back then too, more or less.  As with the more recent data, it is not a perfect relationship, just a really interesting one. 

Crude oil leads bond yields

The upshot is that if crude oil prices are really topping out now, then so should interest rates after the 3-week lag period.  And if you want to know what mortgage rates are going to do in the future, watch what oil prices are doing now.  And if oil prices should resume their rise later this year, then we should expect a corresponding rise in long term T-Bond interest rates.

Tom McClellan
Editor, The McClellan Market Report

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