Oil prices above $100 continue to lift bond yields as inflation fears grow

The useful part

Oil prices and bond yields continue to push higher in European trading today, offering a timely reminder to broader markets that inflation risks remain very much in focus. Brent crude is up over 1% to above $102, while WTI crude now up 1.5% to $97.50 as Middle East tensions continue to keep supply disruptions in focus. At the same time, US Treasury yields are climbing, with 10-year yields up 3 bps to 4.867%.

How it works

• In turn, investors are also demanding higher bond yields as they reassess how much room central banks have to keep monetary policy setting as it is.
• The US Treasury may have announced a $6 billion bond buyback overnight, but that is not enough to keep the bond vigilantes at bay.
• The 5% mark is firmly in traders' crosshair, with the US CPI report adding another potential catalyst.
• The pain point for markets now is that as oil prices continue to track higher, it is a relatively straightforward equation in pushing up inflation pressures and wider inflation expectations.
• Higher energy prices will eventually feed through into transportation, production, and consumer costs.

What to take from it

While $100 oil itself is already making waves across markets, the real trouble is that persistently higher energy prices could lead to a bigger set of problems down the road. At this juncture, oil is not the only concern for the bond market and central banks. Worries over the massive US deficit, heavy government borrowing, and the now di...