Bond yields are pricing in tomorrow’s oil, not yesterday’s inflation data
🎧 Post Summary
📌 Summary
On October 1, the US 10-year Treasury yield rose as high as 5.34% intraday, its highest level since April 2002. Yet August inflation data had come in below expectations. What the market is worried about is not August but the roughly 14% jump in oil prices in September, which has yet to show up in upcoming inflation reports. On the same day, Brent crude gained 4.37% to settle at $102.31 a barrel on China’s halt to refined fuel exports and reports that the US plans to send more forces to the Middle East. Yields then pulled back from their highs after Fed Vice Chair Philip Jefferson struck a cautious tone, and the odds of an October rate hike fell to 28.2%. Which of the two, oil or yields, turns first will likely steer equities for now.
US inflation cooled faster than expected, yet long-term yields jumped to their highest level in 24 years. It looks odd until you notice that international oil prices climbed back above $100 the same day. Here is how oil and yields are pushing each other higher, and where the brakes might come from.
① A 24-year high of 5.34%, then a quick reversal
On Thursday in New York, the 10-year Treasury yield spiked to as high as 5.3445% intraday, the highest since April 2002. The 30-year yield also climbed to the 5.69% range. The September ISM manufacturing report showed a sharp rise in input prices while the jobs data held up, which accelerated the bond selloff. Newspim reported that the 10-year’s gain this quarter was the largest since 1994, a year Wall Street remembers as the “bond massacre.”
The mood changed late in the morning. Fed Vice Chair Philip Jefferson said in prepared remarks that future policy adjustments should be made after careful review of the data, which brought in dip buyers and pulled the 10-year back to around 5.24%. US stocks recovered their losses, with the S&P 500 closing slightly higher at 7,666.45. The dollar hit a 17-month high.
② Why did yields rise when inflation cooled?
According to Edaily, PCE inflation came in below expectations, but GDP was revised up to 2.2% and ADP private payrolls beat forecasts. Wall Street’s view is that even though cooler inflation lowers the odds of an October hike, an economy strong enough to handle high rates gives the Fed less reason to cut quickly. In other words, worries about “higher for longer” outweighed the relief on inflation.
Hankyung added a timing argument. The August data the market is looking at is already in the past, while the roughly 14% rise in oil in September will flow directly into the September CPI and PCE reports still to come. Reuters pointed to high energy prices, inflation worries, strong growth and the possibility of further rate hikes as the backdrop to the bond selloff. The Institute of International Finance (IIF) also flagged large fiscal deficits and rising interest costs in major economies as pressure on long-term yields.
③ Brent at $102: China’s export halt and a US buildup
On October 1, December Brent on ICE London rose $4.28 (4.37%) to settle at $102.31, and November WTI in New York gained $2.45 (2.71%) to $92.87. Prices were down about 1% early in the session before two pieces of news flipped them higher.
- China’s export halt: Citing four sources, Reuters reported that Chinese refiners have stopped exporting refined fuel to destinations other than Hong Kong and Macau until authorities give further guidance. Authorities have reportedly not approved October export quotas, and PetroChina is said to have canceled some gasoline and jet fuel shipments. Asian diesel refining margins rebounded to around $75 a barrel.
- US buildup in the Middle East: The Wall Street Journal reported that the Pentagon plans to send a third aircraft carrier group and additional Marine vessels, along with 9,000 to 10,000 more troops. They are expected to arrive by the end of November.
Diesel supply was already tight, with Russia banning diesel exports through October, so China’s move raised fears of fuel shortages heading into winter. In Korea, refiners such as S-Oil rallied in early trading on October 2.
④ Wall Street raised its oil forecasts, but spot prices are ahead
In a WSJ tally of forecasts from Goldman Sachs, JPMorgan and Morgan Stanley, the average fourth-quarter Brent forecast rose sharply to $90.22 a barrel from $78.92. The WTI forecast was lifted from $74.62 to $85.47. But the October 1 settlements (Brent $102.31, WTI $92.87) are above even these revised forecasts. Spot prices are running ahead of expectations, a sign that the rally since September is still steeper than Wall Street anticipated.
⑤ Where the brakes could come from, and what to watch next
There is a counter-scenario. Supply chains are showing signs of recovery, including Saudi Arabia resuming shipments through its east-west pipeline, so if tensions do not translate into actual production or export losses, the rise in oil could be capped. Hamad Hussain of Capital Economics also assessed that China’s export restrictions will not matter as much as the disruptions to Russian and Middle Eastern refined products. Within the bond market, views are split on whether the selloff went too far.
On the Fed, the CME FedWatch probability of a 0.25-point hike in October has dropped to 28.2%, but some still expect hikes to resume from year-end. Three things to watch: when China resumes exports, whether the US buildup leads to actual military action, and the September inflation data that will reflect higher oil prices.
📌 Investor Notes
- It is too early to say whether the pullback from the intraday high marks a “bottom” for yields. Views differ on whether the rebound in bonds will last.
- Surging oil can help refiners, but it weighs on fuel-intensive sectors such as airlines and transport, as well as on the inflation and rate outlook.
- China’s export halt was reported as indefinite, but whether it resumes is expected to depend on inventories and refinery operations. Be mindful of volatility driven by short-term headlines.
- This post summarizes news reports for information purposes only and is not a recommendation to buy or sell any security or asset. Investment decisions and responsibility rest with you.
To sum up, the roots of this surge in yields lie in future energy prices, not past inflation. While China’s export halt and the US buildup in the Middle East feed supply fears, yields are following oil higher and the Fed is buying time by watching the data. Whether supply recovers or oil climbs further, reading the market through this link should make each day’s headlines less confusing.
References
- Newspim – 24년래 최고 찍은 美 금리, 오전 10시 기점 반락…바닥 논쟁은 계속 (newspim.com)
- Newspim – [채권/외환] 미 국채 10년물 24년 만에 최고 찍고 급반락…달러는 17개월 최고 (newspim.com)
- EToday – 국제유가, 中 연료 수출 중단·美 추가 파병에 급등⋯브렌트유 4.4%↑ [상보] (etoday.co.kr)
- Asia Economy – 中 석유수출 중단·중동 증파…유가 100달러 돌파 (asiae.co.kr)
- Edaily – 물가 식었는데 10년물 5.3%…‘강한 미국경제’가 두렵다 (edaily.co.kr)
- Hankyung – 美 10년물 국채금리 5.34%, 24년만에 최고…전세계 채권 수익률 일제 급등 왜? (hankyung.com)
- Bloter – 美 10년물 금리 24년 만에 최고…글로벌 국채 매도세 가속 (bloter.net)