Falling Oil Prices Drag Down Treasury Yields as Traders Trim Fed Rate Hike Bets
nashnova research
WTI crude hit $110 a barrel then reversed sharply, falling more than 2% and pulling the 10-year Treasury yield from roughly 5.12% to below 5.08% — traders immediately pared bets on how far the Fed will hike over the next year.
Why did oil reverse so fast?
WTI futures touched above $110 a barrel — a high not seen since February — then slid more than 2% in the same session.
The trigger was an unverified report that Qatar and Pakistan had proposed a new framework to restart negotiations aimed at ending the Iran war.
This means → the market briefly traded "Iran peace" as fact; once the report stayed unconfirmed, the rally stalled again.
How does an oil drop lift Treasuries?
Falling oil prices pulled inflation expectations lower. The 10-year yield dropped from around 5.12% to below 5.08%, tracking crude almost tick-for-tick.
Yields fell 3 to 6 basis points across the curve, led by the long end — partially reversing Monday's sell-off driven by a tech-stock rebound.
In plain terms = oil falls → the market sees less inflation pressure → holding bonds looks more attractive → bond prices rise, yields fall.
Are traders still betting on more Fed hikes?
After the joint U.S.-Israeli strikes on Iran in February sent oil surging, the Fed raised rates last month for the first time since 2023.
Markets still fully price one more hike this year and a cumulative three hikes by end of next year — that expectation continues to anchor short-end yields.
This means → the oil pullback only softened the marginal intensity of hike bets. The core rate path has not changed.
What is the housing data saying?
September housing starts fell 5.2% month-over-month to an annualized 1.22 million units — below every forecast in Bloomberg's economist survey.
Pending home sales dropped to a record low; rising mortgage rates keep eroding buyer demand.
ING Americas research head Padhraic Garvey called it plainly: the latest U.S. data is "almost uniformly bond-bullish."
What should we watch next?
RBC Capital Markets strategist Izaac Brook noted that last week's AI risk-aversion trade is still driving rate-market price action; the oil decline is just "additional downward pressure."
This reflects two forces pulling on bonds simultaneously: geopolitical risk (Iran) sets the direction for oil, while the Fed's hiking path anchors short-end pricing.
Put simply = oil and Treasuries moved in lockstep during the session, but whether that link holds depends on whether Iran diplomacy produces real progress — and whether hike expectations soften further.
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