US Bond Yields Surge to 4.6% on Actual Consumer Energy Prices

MacroCommodity Impact 4
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Tisco Securities notes that the yield on the 10-year US Treasury bond has climbed to 4.6%, up more than 60 basis points from pre-war levels, driven primarily by soaring energy prices that are fueling inflation and forcing the Federal Reserve to adopt a more hawkish stance. The research team assesses that current bond yields are still responding significantly to energy prices, but more to the prices consumers actually pay than to crude oil alone. The refinery-gate price, calculated from WTI crude plus the 3-2-1 crack spread refining margin, now stands above 150 to 155 dollars per barrel, compared with around 90 dollars per barrel before the war, and has shown a correlation with bond yields as high as 0.73 since mid-May. In contrast, the correlation between bond yields and crude oil prices is only 0.42. The research team expects refining margin pressures to remain tight, especially for diesel, which is being hit by the renewed intensity of the Russia-Ukraine war. This has caused Russian refineries to lose over 2 million barrels per day of capacity and forced them to suspend fuel exports. Combined with upside risks to crude oil prices, which are likely to climb back above 100 dollars per barrel, these factors are putting significant pressure on real consumer energy costs. The research team therefore expects the 10-year US Treasury yield to trend higher, moving in a range of 4.4% to 4.8% in the second half of this year.

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