Submitted by Eric Bush via Gavekal Capital blog,
It is somewhat hard to believe but oil prices are up nearly 90% over the past year. The past two times oil prices have increased this much year-over-year, US 10-year bonds rallied quite significantly.
In 2008, oil was up over 100% in July and bond yields were hovering just over 4%. Ultimately, yields fell to 2.10% as the year-over-year change in oil dropped to -63% by the end of that year.
In 2010, oil prices had climbed over 120% year-over-year and bond yields were around 3.60%. By August 2010, the year-over-year change in oil had fallen to about 0% and yields had dropped to 2.4%. Yields have fallen by 22 bps since making a high in mid-December.
Given the significant increase in oil prices in the past year, the decline in bond yields may just be beginning.