Treasury yields fell overnight as crude slid, then rose as crude rebounded. The link between the two has rarely been this tight, and mortgage borrowers are already paying for it.
The bond market spent Wednesday morning doing whatever oil told it to do. The yield on the 10-year Treasury note fell to about 4.947% in early trading as Brent crude extended its slide below $100 a barrel. When Brent reversed and climbed back above $100, the 10-year followed, rising about 2.5 basis points to roughly 4.995%. The 30-year bond yield rose to about 5.32% and the two-year yield climbed to about 4.80%.
That lockstep is not a coincidence. The correlation between oil prices and Treasury yields recently hit its highest level in 35 years as investors treat every move in crude as a direct input into inflation expectations. Nine days ago, with Brent trading near $110 as military strikes spread across the Persian Gulf, the 10-year yield touched 5.04%, a multi-year high.
"The fall in crude is a significant macro release valve," Patrick Munnelly, a strategist at Tickmill Group, said Wednesday. "The recent oil spike had fed directly into inflation expectations, central-bank pricing and long-end yields." Wednesday's reversal showed how quickly that valve can close again.
The pressure on long-term rates is already reaching households. The average contract rate on a 30-year fixed mortgage rose to 7.12% last week from 6.97% in the Mortgage Bankers Association's weekly survey, the highest level since 2024. Mortgage and refinance applications both fell, while the share of borrowers choosing adjustable-rate loans rose, a typical response when fixed rates climb out of reach.
Equities are feeling it too. S&P 500 futures slipped to session lows as yields rose, even after the Nasdaq Composite closed at a record on Tuesday. The S&P 500 sits about 0.7% below its own all-time high.
The Treasury Department adds two more tests Wednesday. It announces results of a $70 billion five-year note auction at 1 p.m. Eastern, and it is set to reveal the size of its next bond-buyback operation. A similar buyback announcement earlier this month triggered a selloff in Treasurys after the planned size fell short of what investors expected, making the figure a live risk for a market already trading within a few basis points of a psychologically important level.
For investors, the takeaway is that the path of long-term rates this autumn runs through the Strait of Hormuz as much as through the Federal Reserve. As long as oil and yields move together this tightly, every headline out of the Gulf is also a headline about mortgage rates, equity valuations and the government's borrowing costs.