Rising oil prices are pushing up 10-year inflation expectations and Treasury yields

By Vivien Lou Chen

The 10-year Treasury yield took a breather on Tuesday from its recent run-up, but remains near its highest level since November

Oil appears to be playing a major factor in this week's rise of the benchmark 10-year Treasury yield to its highest level since November, and is boosting market-based inflation expectations over the long run.The proof is in what's known as the 10-year break-even rate, a gauge of long-term, market-based inflation expectations. It is calculated by taking the difference between the 10-year nominal Treasury yield BX:TMUBMUSD10Y and the rate on Treasury inflation-protected securities, and has jumped since December to roughly 2.4%."Much of that move is due to rising oil prices, a factor to which the breakevens are particularly responsive," John Velis, an Americas macro strategist for BNY Mellon (BK), wrote in a note on Tuesday. The breakeven rate is following a path similar to that of oil prices (CL00) (CL.1), which have climbed to more than $85 a barrel from around $70 at the start of the year.

Oil tends to be treated by Federal Reserve policymakers and many in the financial market as more of a temporary trend, one with so much volatility that it's often stripped out of the core readings that central bankers care most about. Less has been said about its ability to influence longer-run trends.

The 10-year Treasury yield has climbed by about half a percentage point this year - finishing at 4.365% on Tuesday, a day after reaching 4.422% or its highest closing level since Nov. 24. According to Velis, "it's a combination of higher oil prices and higher expectations for the [Fed's] eventual policy rate that's driving the move higher in yields." The rally in oil and run-up in Treasury yields took a breather on Tuesday as investors waited for Wednesday's release of the March consumer-price index. Economists are bracing for the likelihood of more 3%-plus readings in the annual headline rate, though monthly readings are expected to have eased to 0.3%. A team of strategists at Barclays is warning about the risk that oil can resume its climb. Geopolitical risks in the Middle East have shown no signs of abating, they said. In addition, improving global demand is also contributing to the upside risks in oil, which may "reawaken" inflation concerns and derail the recent stock-market rally, the strategists wrote in a note.Buying prevailed in the U.S. government-debt market on Tuesday as investors took advantage of the highest yields in more than four months, which sent market-based rates lower for the first time in three sessions. Stocks DJIA SPX COMP finished mixed in New York trading.

-Vivien Lou Chen

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04-09-24 1600ET

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