US Treasury Yields and Oil Prices Reach 35-Year Correlation High

The correlation between U.S. 10-year Treasury yields and West Texas Intermediate (WTI) oil prices surged to 65% last week, marking a 35-year high. This level surpasses previous peaks recorded during the COVID-19 pandemic and the 2011 Arab Spring, trailing only the record 66% correlation established during the onset of the First Gulf War in 1990.

This shift indicates that future yield movements may be driven more by geopolitical developments in Iran than by Federal Reserve policy. Market data provided by VIX shows that while broad index volatility has declined, single stock volatility has increased, resulting in a 21.6% spread between the VIX Index and the VIXEQ Index.

Investor sentiment in the options market has turned more constructive. Traders have rotated from hedges into calls, which caused the SPX 1M skew to drop from the 58th percentile to the 29th percentile.