Cboe Global Markets reported in its Macro Volatility Digest on September 21 that the correlation between WTI crude oil and 10-year Treasury yields reached 0.96 in mid-September. This figure represents a 35-year high for the relationship between these asset classes.
The surge in correlation is driven by supply constraints linked to geopolitical tensions in the Strait of Hormuz, which handles approximately one-fifth of global oil supply. WTI crude prices have recently exceeded $100 per barrel as a result of these disruptions.
In September, the Federal Reserve raised interest rates to a range of 3.75-4%. Rising oil prices are contributing to inflation expectations, which in turn pushes Treasury yields higher, supporting the current hawkish monetary policy stance.
Previous peaks in correlation occurred in June 2019 and October 2014, but the current environment is unique due to the combination of triple-digit oil prices, active Fed tightening, and geopolitical instability, which creates a stress test for institutional risk models.
