US yields remained above 5% this week even as oil prices fell, bringing the strength of the US economy and a global bond sell-off into simultaneous focus. Developments surrounding the relationship between oil prices and yields also affected equities and foreign exchange markets.
Oil prices fell at the start of this week on the recovery in Saudi oil exports and the reopening of east-west pipelines, with WTI settling in the $95 range and North Sea Brent around $100. The US 10-year Treasury yield briefly fell below 5%, but rose back above 5% in the second half of the week, reaching the 5.2% range.
Although lower oil prices encouraged a retreat in inflation concerns, strong US demand, persistent inflation and expanding fiscal deficits heightened expectations of additional rate hikes, keeping yields elevated independently of oil prices. A renewed rise in oil prices and concern over the situation in the Middle East also pushed oil prices higher, while bonds came under selling pressure globally.
Strength in US economic indicators emerged as a factor pushing yields higher, and high yields above 5% continued to affect dollar/yen and equity markets. Equities at times remained firm on moves in AI-related stocks, but the yen fell to around ¥159 to the dollar, and moves to restrain yen weakness also came into focus toward the weekend.
The market is moving toward a phase in which the retreat of the oil shock and the continuation of high interest rates must be considered as separate factors. A renewed move in oil prices could spread to interest rates, while the focus is on how long yields can remain above 5% and how equities and foreign exchange markets price in that level.