The Oil Price Spike’s Implications for Interest Rates: What the Data Says

Oil prices have risen sharply in reaction to the military strike on Iran. As of March 9, the Brent crude oil future, at $89.40/barrel was up by 23% from $72.48 on February 27, the day before President Donald Trump announced the attack.^[1]  The price surge reflects the current blockage of oil shipments through the Strait of Hormuz, through which 20% of global production passes.

It is possible that the current price spike will ultimately prove short-lived. Indeed, the crude oil indicator has already declined from a March 8 intraday high of almost $120/barrel. Conceivably, the military action’s objectives will be achieved comparatively swiftly.  China, which crucially depends on Iranian oil, especially since its Venezuelan supply was cut off, is likely to pressure Iran to allow the Strait of Hormuz to reopen.

In view, however, of the alternative possibility that oil prices will remain elevated for an extended period, fixed income investors are naturally keen to know the implications for long-term interest rates.  A logical A-to-B-to-C inference might be that with oil prices going up, inflation will increase and therefore long-term interest rates will necessarily rise.  After all, financial theory tells us that interest rates represent cost of capital within the economy plus an inflation premium.

That reasoning would seem to be supported by the bond market’s reaction so far to the Iranian

military strike.  The benchmark ten-year Treasury bond yield rose from 3.94% on February 27 to 4.11% on March 10.  Judging by the historical record, however, it is not safe to assume that oil prices and interest rates will move in tandem over a more extended period.  

Quantifying the Oil-Interest Rate Link

We calculated the past 37 years’ year-over-year changes in both the Brent crude oil price and the ten-year Treasury yield. A little less than half of the years—16 out of 37—the crude oil price and the ten-year Treasury rate moved in opposite directions.  The biggest change in the oil price occurred in 2007. It increased by 33% that year, while the 10-year Treasury rate decreased by 68 basis points. 

These findings do not indicate a genuine tendency for oil prices to go one way and interest rates the other. That result’s 16-out-of-37 (43%) frequency is not sufficient to predict an outcome.  At 35%, the correlation (R) between the two series is weak. It means only 12% (R²) of the annual change in ten-year Treasury rates is explained by the change in the crude oil price. 

Other factors that play large roles in the fluctuations of interest rates include changes in economic conditions and monetary policy.  If, for example, the economy lapses into recession—possibly due in part to a sharp rise in oil prices—interest rates will most likely fall. On the other hand, if higher energy prices drive up inflation expectations, the Fed will probably raise short-term rates, with long-term rates following suit. Sometimes, the ten-year Treasury yield makes a substantial move for reasons having nothing at all to do with oil prices.  For example the Brent price ended 2013 almost unchanged (down just 0.3%), yet the ten-year Treasury yield jumped by 1.27 percentage points in 2013, its fifth largest increase during the 37-year period of our study.

The Bottom Line

Even though investors on balance entered 2026 expecting the Fed to continue cutting short-term interest rates, the ten-year Treasury yield might very well end the year materially higher than it began. If that happens, the explanation is likely to lie elsewhere than in a sustained rise in oil prices. The notion that the two data series are bound to march together by virtue of their mutual connection with inflation, plausible though it may sound, is not  borne out by historical evidence.

^[1] The source for all prices and yields in this report is Bloomberg Professional Services.