Here's something weird in the bond market that almost nobody is talking about. It's the kind of thing that makes you scratch your head and wonder if everyone is looking at the wrong chart.
WTI crude oil rallied to $99 on Friday, on track to close at its highest level since July 2022. Meanwhile, the 2-Year Treasury yield—which is basically the market's best real-time guess at where the Federal Reserve is going with interest rates—is sitting at 3.92%.
The last time oil was trading at these levels, the 2-Year yield was above 5%. So right now, there's about a 100-basis-point gap between where the yield is and where recent history suggests it probably should be. That's a big gap. It's the kind of gap that usually gets closed, one way or another.
Everyone's Watching Oil. The 2-Year Yield Is The Real Threat.
John Roque, a technical analyst at 22V Research, flagged this divergence in a note this week. His argument is pretty pointed: oil is getting all the attention as "public enemy #1," but the 2-Year Treasury yield is the instrument that will ultimately do the most damage.
"Right now, oil is 'public enemy #1', but I think it'll ultimately be the US 2-Year Treasury Yield," he wrote.
Roque's near-term target for the 2-Year is 5%. That's the top of a range that held at the 2006 peak and again at the 2024 high. Getting there from 3.92% would be a move of roughly 100 basis points. That's enough to reprice the entire front end of the Treasury curve and, more importantly, effectively kill the market's lingering expectation that the Fed will cut rates this year. If that happens, the conversation flips right back to whether the next move is a hike.
"The US 2-Year Treasury yield is underpriced vis-à-vis oil," Roque added. In plain English: bonds look too cheap relative to what oil is telling us about inflation and growth.
The Tail Risk That Is in Nobody's Model
The 5% target is the near-term story, but Roque flags a longer-term scenario that deserves some serious attention. He calls it a "Potential 20-Year Brobdingnagian base."
First, the word: "Brobdingnagian" comes from Gulliver's Travels and refers to something of colossal, almost incomprehensible scale. Roque is using it to describe a massive technical base that's been forming on the monthly chart of the 2-Year yield around the 5.20% level since roughly 2006.
A breakout from that base—still a distant prospect—would imply a yield target that, in Roque's words, "noboday has priced into any forecast." It's the kind of tail risk that sits in the background, the thing that could make all the current forecasts look very silly very quickly.
