Oil Strength Ignites Rates Volatility Convergence

The relationship between oil and interest rates is becoming increasingly intertwined. Bloomberg macro strategist Frank Monkam notes that the correlation between Brent crude and 10-year Treasury yields has strengthened to its highest level of the cycle.

However, the volatility market seems oblivious to this connection, treating them as though they operate in separate spheres. This gap may soon reach its limits.

Brent three-month implied volatility is around one standard deviation above its five-year norm, while Treasury volatility is approximately one standard deviation below it.

The resulting volatility spread is more than two standard deviations wide, despite Brent and 10-year Treasury yields exhibiting their strongest correlation of the cycle. This divergence suggests that oil strength can push yields higher through inflation and a more hawkish policy path, or lower through a deeper growth shock.