US bond yields and oil prices again stood out on Wednesday with big losses that raised more questions than they answered.
Oil prices fell more than $US1 a barrel in another volatile session as investors feared this week’s collapse in OPEC+ talks could mean more oil is on the way.
And in the absence of any news or data on the health of the US economy (especially weak data) and signs of stress in financial markets, economists were at a loss to explain why the world’s key indicator rate – the yield on US 10-year bonds dipped to the lowest level since February of 1.288% before closing at nearly 1.32%
Analysts wonder if the uncertainty in oil markets (which could change quickly if Saudi Arabia and the UAE kiss and make up) is helping drive bond yields lower. Certainly the US dollar is now strengthening as bond yields slide.
The 10-year yield is now almost half a per cent (46 points) under the 2021 high of 1.788% at the end of March when markets were in full panic about the prospect of rising inflation.
Minutes from the last Fed Open Markets Committee on Wednesday contained nothing alarming – they were both hawkish and dovish on rates and inflation (that depends on which side of the rates/inflation divide you sit).
But nothing to produce a slide under 1.30%.
Crude oil markets have been volatile over the last two days following the breakdown of discussions on the size of the global production cap between Saudi Arabia and United Arab Emirates.
The message from the growing uncertainty is that the cap is in danger of collapsing, which could return the oil market to open slather – as it was in the early days of the pandemic and the huge price collapse (to negative $US37 a barrel in April 2020).
Brent crude settled at $US73.43 a barrel, falling $US1.10, or 1.5%. In New York, West Texas Intermediate settled at $US72.20 a barrel, shedding $US1.17 or 1.6%. Both benchmarks rose early in the session, then fell away and closed with losses, just as they did on Tuesday.
OPEC+ is still maintaining nearly 6 million bpd of output cuts. It was expected to add to supply, but three days of meetings failed to close the sharp divide between the Saudis and the Emiratis (who want to rebase their production level and produce more oil. but if that is allowed, a lot of other producers in the group will demand the same right).
Oil prices were also pressured by a rally in the US dollar which responded to the slide in bond yields. That in turn sent the value of the Aussie dollar back under 75 US cents, and it is only 20 or so points away from a 2021 low of 74.72 in early June.
