Brent traded near $112.18 early Thursday while the 10-year yield slipped to about 5.09%, gold fell 1.1% and the yen firmed. In this conflict, oil spikes have usually pushed yields up. This time the bond market bought duration.
For most of this war, a jump in oil has meant a jump in Treasury yields, because traders read higher energy prices as more inflation and a tighter Federal Reserve. Overnight into Thursday, the two moved in opposite directions.
Brent crude traded at $112.18 a barrel at 5:33 a.m. Eastern, up $3.36, or 3.1%, from Wednesday's close of $108.82, after a session range of $109.73 to $112.67. West Texas Intermediate was at $99.46, up 2.4%. Over the same hours the 10-year Treasury yield fell to about 5.09% in early European trading, roughly 4 basis points below Wednesday's close of 5.13% on Treasury's daily par curve. The 30-year yield fell to about 5.38%, against a 5.42% close.
The rest of the tape
The other havens moved the way a growth scare would suggest. Gold futures fell 1.1% to $4,103.70 an ounce, so the metal did not act as an inflation hedge. The dollar lost 0.7% against the yen, to 156.92. The VIX volatility index rose 1.68 points to 18.36. The Euro Stoxx 50 was down 1.6%, and Asian markets had already fallen hard: the Kospi lost 3.5%, the Nikkei 2.7% and the Hang Seng 3.0%. Futures on the Nasdaq 100 were down about 1.9% before dawn in New York, after a run of results from large technology companies that left investors questioning the cost of artificial intelligence spending.
Hauke Siemssen of Commerzbank described the session as a "tentative risk-off, with U.S. Treasurys supported and struggling equities."
Two readings
One reading is that growth risk now outweighs inflation risk. An oil shock acts as a tax on consumers and companies, and it arrived alongside a slide in Asian technology shares and fresh doubts about whether debt-funded AI investment will pay off. On that view, investors bought bonds because they expect demand to slow, and lower gold prices fit a picture of liquidation rather than inflation hedging.
The other reading is that this is an overnight haven bid that will not survive the U.S. session. The inflation channel has not gone away: heating oil rose 1.9%, and the long end of the Treasury market is still struggling to attract buyers. Wednesday's $13 billion 20-year bond auction cleared at 5.469%, the highest yield for that maturity since 1986, and it priced about 0.9 basis point above the yield in when-issued trading just before the sale. Indirect bidders, a group that includes foreign buyers, took 58.2% of the bonds, below their 65.2% average over the previous six auctions. Treasury also has 2-, 5- and 7-year notes to sell next week, overlapping the Fed's Oct. 27 to 28 meeting.
Nothing in the overnight evidence separates the Gulf headlines from the equity selloff as the cause of the bond rally. Both happened in the same hours.
What to watch
Thursday's U.S. calendar puts the overnight move to an immediate test. Weekly jobless claims are due at 8:30 a.m., with economists expecting 200,000. Treasury announces next week's note sizes at 11 a.m. and sells $26 billion of five-year inflation-protected securities at 1 p.m., a direct read on how much oil-driven inflation investors are willing to price. If yields hold their decline through the TIPS auction while Brent stays above $110, the growth reading gains weight. If yields climb back toward Wednesday's close, the overnight rally was positioning.