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US 10-Year Yields May Hit 3.75% on Oil Slide, Yardeni Says

(Bloomberg) -- Falling oil prices may drive benchmark Treasury yields back to levels last seen more than a year ago, according to Wall Street research veteran Ed Yardeni.

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Yields on 10-year Treasuries could hit 3.75% if the oil price continues to slide and the Federal Reserve lowers interest rates next week, said the strategist. His argument is based on the long-run correlation of the two asset classes, which are linked through oil’s impact on inflation.

“A growing glut of oil and fear of a global economic slowdown have pushed US West Texas Intermediate crude prices to their lowest point since fuel markets were rebounding from the Covid crash,” Yardeni Research Inc. wrote in a note on Oct. 20. “That will help push headline consumer inflation rates down and boost consumers’ purchasing power.”

The move would add yet more steam to a recent rally in Treasuries, which have been buoyed by bets on interest rate cuts and jitters around regional banks in the US. The 10-year yield was one basis point lower at 3.97% at 5:45 a.m. in New York, cementing a roughly 18 basis points decline this month.

Crude oil futures have dropped from as high as $80 a barrel in January to below $58 on Tuesday, and 10-year yields have also tumbled this year. But the bond rally is coming at an unusual moment in markets: Treasuries are gaining at the same time as stocks, marking a rare alignment as traders bet the economy can slow just enough to tame prices without sliding into recession.

Oil’s slide could bolster Treasuries given lower energy costs are likely to further cool inflation and strengthen the case for more Federal Reserve interest rate cuts, potentially giving current “Goldilocks” markets more room to run.

--With assistance from James Hirai.

(Updates levels in the fourth paragraph.)