The correlation was established as a result of dynamics of oil prices, when falling oil was perceived as a risk to . Expectations of lower have driven the 10-Year Yield down with the WTI Oil . Market has perceived the situation correctly, as the CPI has fallen down to about 0% on y/y basis consequently, where it stands now.
Recently, however, the 10-Year Yield started to diverge from WTI Oil price dynamics. As can be seen on our chart, the oil is trading laterally in the range of 57-62 USD per barrel since May 2015. The 10-Year Yield, on the other hand, actually started to move upwards since then, along the upper 1-st standard deviation from its quarterly (66-day) moving average.
Our idea is that current upwards dynamics of the 10-Year Yield in relation to lateral WTI Oil reflects positive expectations of market participants. It means that in the observable future the CPI and PPI measures are likely to start bottoming out on y/y basis.
If our proposition is true, it will be a positive development in terms of financial markets, as higher expectations will offset the deflationary impact of current slow CPI and PPI measures on the perceptions of market participants.