The relationship between different asset classes is not static. It changes with political and economic developments. As the chart above reveals, bond yields and oil prices tend to move in tandem, although this correlation is far from being set in stone.  At times of economic hardship, investors tend to view the most reliable investment tool in the world, U.S. Treasury bonds, as the safest of havens and since its price moves opposite to its yields, the correlation between oil and yields is high. When the economy roars, oil demand is elevated, oil prices rise , and the price of money declines aiding the expansion.

On September 18, the Federal Reserve decided to lower the benchmark U.S. interest rate by 0.5%. It ended four years of monetary austerity that saw the cost of borrowing rise from 0% to 5.5%. This cycle of tightening proved effective. The restrictive monetary policy helped consumer price inflation retreat from above 9% in June 2022 to 2.5% by August 2024. Core reading, which omits volatile food and energy prices, descended from 6.6% to 3.2% in the past two years. The Fed fulfilled one of its mandates, price stability, without adversely impacting the job market and pushing the economy into recession. Soft landing has seemingly been achieved.

It is in this context that the beginning of the new monetary cycle must be viewed. The updated dot plot, the forecasts of U.S. monetary acolytes, foresees another 0.5% rate cut this year with borrowing costs dipping to around 3.25% by the end of 2025. Akin to the rate prognosis of Fed officials, the bond market is also a prediction of future rate expectations. The downward trend in bond yields, which started in April this year and is discernible on the graph, is expected to continue in the foreseeable future. It envisages a healthy economic backdrop, which, in turn, supports oil demand. Naturally, myriad other factors influence the price of oil but unless interest rate expectations worsen unexpectedly, the positive correlation between bond yields and oil should come to a halt and while a perpetual rally in oil prices would be a brazen expectation, the narrowing of the gap between oil and yields that started at the beginning of September will most plausibly continue.