- West Texas Intermediate topped $110 a barrel for the first time since April before erasing the gain and briefly falling more than 2%, settling the panel at 102.96. The initial retreat was sparked by an unconfirmed report that Qatar and Pakistan had issued a fresh proposal to revive negotiations to end the Iran war.
- Treasuries followed almost exactly. The 10-year yield sat near 5.12% as crude passed $110 and fell below 5.08% as oil reversed, with yields across maturities down three to six basis points led by longer-dated debt.
- Bloomberg’s own chart notes the significance: the 10-year yield has resumed tracking oil. For much of this year oil has driven yields, last week bond investors ignored it to trade the AI selloff, and now the correlation has returned. The regime flipped twice within a week.
- US data added to the rally. September housing starts fell 5.2% to an annualised 1.22 million, trailing every estimate, and pending home sales fell to a record low as higher rates raised mortgage costs.
What Happened?
Izaac Brook, US rates strategist at RBC Capital Markets, said the AI risk-off trade that emerged last week remains top of mind in rates markets and appears to be driving price action, with the move lower in oil also helping. Padhraic Garvey, head of Americas research at ING, said there is a bond bullish tint to the US data pretty much across the board. The surge in oil prices following the US-Israeli attack on Iran in late February reignited inflation and led the Federal Reserve to raise rates last month for the first time since 2023. Traders continue to fully price another increase by the end of this year and three in total by the end of next year.
Why It Matters?
The entire inflation case now turns on a report nobody has confirmed. An unverified account of a Qatari and Pakistani proposal to restart negotiations moved crude from above $110 to down more than 2% in a single session, which is a reasonable measure of how much of the current oil price is conflict premium rather than physical shortage. If genuine talks begin, that premium unwinds and with it much of the argument for further rate increases, since September consumer prices rose 3.7% largely on fuel. Readers should hold that as the single largest variable in the macro outlook, and note that it is presently a rumour. The correlation flip is worth understanding for anyone positioned in rates. Last week bonds rallied because equities fell and money sought safety, ignoring oil entirely; this week they are tracking crude again. Which regime applies determines what moves yields, and it changed within days. A bond investor who assumed the AI risk-off dynamic would persist was positioned for the wrong driver by Tuesday. The direction of policy has not changed despite the rally. Traders still fully price a hike this year and three by the end of next, so yields are falling on weakening growth rather than on expected easing. That distinction matters because it implies the curve is responding to housing contracting and activity softening while the committee continues tightening, which is an uncomfortable combination. Pending home sales at a record low, alongside starts trailing every forecast and builder sentiment at a 14-year low, is the clearest evidence yet that the rate-sensitive part of the economy is contracting.
What Next?
Confirmation or denial of the Qatar and Pakistan proposal is the most consequential near-term event for both oil and rates. The Federal Reserve meets October 27 and 28 with markets pricing roughly 29% for a move this month but a full hike by year end. Watch whether yields continue tracking oil or revert to following equities, since the two have alternated within a fortnight. Housing data has now disappointed across starts, pending sales and builder sentiment, which is the softening Garvey describes.
Affected Tickers and Coins: CL, ZN, ZB
Source: Bloomberg
