Financial and commodity markets are currently all about oil. In peacetime, oil investors tend to follow the sentiment of the wider investment world; during wars, they shape it. Energy-induced inflation, coupled with political turmoil in France, is putting enormous pressure on bond yields, making public debt increasingly difficult to service and heralding tax increases and spending cuts further down the line.
Given the newly found love affair between oil prices and bond yields, it is self-evident, almost axiomatic, that borrowing is becoming ever more expensive. Although US Treasury yields pulled back from recent highs after decent demand at the latest 30-year bond auction, fears of inflationary pressure and competition between sovereign and corporate debt will likely keep borrowing costs elevated.
The bond market remains ruptured as even the gods of Wall Street are held ransom to the permalink between the fortunes of oil and the state of future interest rates. As oil prices traverse a piste of moguls that one day show diplomatic breakthrough, the next threats of further military action and/or concentration sometimes centring on feedstock being increasingly available from the Middle East only to flip back to the paucity of global refined fuel inventory, they cement the inverse correlation between oil and bonds.
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