12d • 💻 Applied Modeling
Bond yields & Oil prices - interviews
Attached is an Interesting and useful plot to know for any interviews in the finance/energy space. It has become quite popular.
It is a popular plot that shows how the US Treasury yield moves with Brent Crude oil price. Specifically:
- The US government (its Treasury Department) borrows money by selling bonds to raise cash for things like defence, infrastructure, and social programs. It borrows from anyone willing to buy those bonds e.g. from China and Japan, the Federal Reserve, US banks, pension funds, mutual funds, hedge funds, and even individuals. One of these bonds is the US 10-year Treasury. And its yield is what the US government pays to those who bought the bond (and so lent the government money for 10 years). So if you buy a $1,000 bond with a 4% yield, you get roughly $20 every six months (that's $40/year), and then at the end of the 10th year you get your original $1,000 back. That's why bonds are attractive to pension funds and retirees — they provide a steady, predictable income stream, not just a lump sum at the end.
- and the price of Brent crude oil : There are two main oil benchmarks: Brent (from the North Sea) and WTI (West Texas Intermediate, the US domestic benchmark). Brent is the one that matters globally as 65% of all internationally traded oil is priced off Brent. So when they say "oil is at $96 a barrel," they usually mean Brent. The reason everyone cares is that oil feeds into the cost of almost everything. It's petrol at the pump , it's the cost of shipping goods, manufacturing plastics, heating homes.... When oil goes up, the price of basically everything follows, which is inflation.
We see how these two tend to move together : when oil gets expensive, it makes everything else more expensive too (inflation), and investors then demand higher yields to lend money because they want to be compensated for that inflation eating into their returns.
E.g. in the 2020 pandemic both collapsed.
In the 2021–22 recovery both surged.
Now in 2026, where the Strait of Hormuz crisis spiked oil from $61 to over $100 , also yields jumped alongside it due to the wave of inflation.
Why care:
- Because the US 10-year yield is the heartbeat of global finance. Most international debt, mortgages, and corporate loans around the world are priced relative to it . If the US 10-year goes up, borrowing costs rise globally . The dollar is the world's reserve currency, so when US yields move, capital flows shift globally. If you have a mortgage in the UK, your rate is indirectly influenced by what's happening in US Treasuries.
- The government sells the bonds, and the investors buy them (i.e. lend the money). Yields are what investors demand from the government in return for lending it their money. When inflation rises, investors ask for a higher return so they'll only buy bonds at a lower price, which mechanically pushes the yield up.
Investors are eg a huge mix: central banks (Bank of Japan, People's Bank of China), sovereign wealth funds (Norway, Saudi Arabia), pension funds managing retirement savings, insurance companies, commercial banks, hedge funds, mutual funds and ETFs like those from Vanguard or BlackRock, and retail investors eg regular people buying Treasuries through their broker .
And as we just discussed, inflation pushes bond yields up, which makes borrowing more expensive worldwide, which slows economies down.
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Bond yields & Oil prices - interviews
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