One of this year's most important relationships in global financial markets is falling apart

By Joseph Adinolfi

Treasury yields and oil prices have started moving in opposite directions. Is it a signal that investors are bracing for a Fed policy mistake?

A key relationship in global markets is beginning to unravel.

One of this year's most important relationships in global markets has started to unravel over the past couple of weeks. Investors are scrambling to figure out what it might mean for the economy, and their portfolios.

For months, as oil prices have risen, Treasury yields have followed higher mostly in lockstep. But that relationship started to weaken in August, as yields continued higher even as oil prices traded sideways. And last week, it completely broke apart. Global oil prices (BRN00) briefly rose to $110 a barrel as a Houthi attack on an airport in Saudi Arabia stoked fears about further disruptions to global energy supplies. But instead of climbing, bond yields moved sharply lower, with the 10-year yield registering its biggest weekly drop since February.

That caused the 20-day rolling correlation between oil prices and Treasury yields to take a sharp turn lower, touching its lowest level since late 2024, according to an analysis from Dow Jones Market Data. The trend persisted on Monday. Crude-oil prices were falling, while Treasury yields climbed.

Last week also saw the Nasdaq Composite COMP move lower as Treasury yields declined - another notable shift. Since mid-August, the tech-heavy Nasdaq had largely continued higher, even as rising yields appeared to put pressure on shares of companies believed to be more sensitive to higher rates.

"Every relationship in markets that we thought we had taken for granted broke apart in the back half of September," said Nicholas Colas, co-founder of DataTrek Research, during an interview with MarketWatch.

It might be a few weeks before investors have a clearer picture of what might be driving this, Colas said. But for now, these changes are definitely capturing investors' attention, evidenced by the flurry of questions about it that Colas says he has received from clients.

What does it mean?

As for what this might mean for markets and the economy, there are a couple of schools of thought.

Bonds rallied last week, with the 10-year Treasury yield BX:TMUBMUSD10Y seeing its biggest weekly decline since February, according to Dow Jones Market Data. Even a couple of hotter-than-expected inflation reports weren't enough to push yields higher.

To Michael Lebowitz, a portfolio manager at RIA Advisors, the recent sharp pullback in semiconductor names and other hot AI-linked stocks suggests some are beginning to doubt the durability of the AI investment boom.

If they're correct, then that means the Federal Reserve's interest-rate hikes could come back to bite it, Lebowitz said. Rising borrowing costs could crimp investment on new data-center projects, which would in turn dampen the pace of growth, while easing pressure on inflation - just as the Fed is taking aggressive steps to bring rising prices under control.

This is potentially laying the groundwork for another Fed policy mistake, Lebowitz said. Back in 2022, the central bank, then led by Jerome Powell, was widely criticized for not moving quickly enough to hike rates in the face of rising inflation.

So far, few signs of a slowdown are showing up in the official economic data. But the bond market's behavior last week - with yields falling despite a couple of hotter-than-expected inflation reports - means investors could be starting to rethink expectations for strong growth going forward.

"Is the bond market sniffing out a policy mistake? In other words, did the CPI and PPI reports last week force the Fed to consider more rate hikes, potentially taking things too far?" Lebowitz said.

On the other hand, last week's bond-market rally might have simply been a response to investors becoming too bearish.

As bond yields rose to their highest levels in decades, data from the Commodity Futures Trading Commission showed speculators had taken aggressive bets that prices would continue to fall.

Heading into last week, a number of technical indicators suggested that bonds were heavily oversold, Colas said. Sentiment in the oil market, meanwhile, appeared much less stretched.

"Any kind of rally [in bonds] was going to see some short covering," Lebowitz said.

-Joseph Adinolfi

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10-19-26 1343ET