Wall Street prophet Yardeni: Falling oil prices will push the 10-year US Treasury yield down to 3.75%

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Senior Wall Street researcher Ed Yardeni predicts that the continued decline in oil prices may push the benchmark 10-year U.S. Treasury yield back to levels not seen in over a year.

Yardeni believes that if oil prices continue to fall and the Federal Reserve decides to lower interest rates next week, the 10-year Treasury yield could reach 3.75%. His argument is based on the long-term correlation between oil prices and Treasury yields, with the core logic being that oil prices influence inflation, which then transmits to the interest rate market.

This prediction adds more momentum to the recent rally in U.S. Treasuries. Boosted by expectations of a Fed rate cut and concerns about U.S. regional banks, the Treasury market has already rebounded. On Tuesday, the 10-year Treasury yield hovered around 3.96%, with a monthly decline of about 17 basis points.

It is worth noting that the rise in bonds coincides with a “rare” moment in the market: U.S. Treasuries and U.S. stocks are rising together. This rare alliance of asset prices reflects traders’ bets that the economy can achieve a “Goldilocks” soft landing—slowing just enough to contain inflation but not enough to slip into recession.

Falling Oil Prices and Cooling Inflation

Yardeni Research Inc. wrote in a report dated October 20:

“A growing oil surplus and concerns about a global economic slowdown have pushed the price of West Texas Intermediate (WTI) crude to its lowest level since the fuel market rebounded after the COVID-19 pandemic.”

The report believes that “this will help lower the overall consumer inflation rate and boost consumer purchasing power.” Data shows that WTI futures, the benchmark for oil prices, have fallen from a high of $80 per barrel in January of this year to below $57 as of this Tuesday.

So far this year, as oil prices have plummeted, the 10-year Treasury yield has also dropped sharply, giving the Federal Reserve more reasons to continue cutting rates, and providing more room for the current “Goldilocks” market.

Analysts believe that this bond rally has occurred at an unusual market moment: Treasuries and stocks are rising simultaneously, a rare alignment that reflects traders betting that the economic slowdown will be just right—enough to curb price increases without sliding into recession.

Lower energy prices may further support Treasury performance, providing investors with a relatively favorable market environment.

Risk Warning and DisclaimerThe market carries risk, and investment should be done cautiously. This article does not constitute personal investment advice, nor does it take into account the specific investment objectives, financial situations, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their own circumstances. Investing accordingly is at your own risk. ```