Crude Oil → Fed Policy Pricing → UST Yield Linkage Returns

Research evidence excerpt

Crude Oil → Fed Policy Pricing → UST Yield Linkage Returns

Idea

July 10, 2026 10:07 PM GMT

Morgan Stanley & Co. LLCMUS Rates Strategy | North America Matthew Hornbach

Strategist

Crude Oil → Fed Policy Pricing Matthew.Hornbach@morganstanley.comShaun Zhou +1 212 761-1837

Shaun.Zhou@morganstanley.com +1 212 761-3348

→ UST Yield Linkage Returns Martin W Tobias, CFA

Martin.Tobias@morganstanley.com +1 212 761-6076

The past week saw crude oil prices drive the pricing of Fed Aryaman Singh

policy and Treasury yields after the relationship broke when oil StrategistAryaman@morganstanley.com +1 212 761-1993

prices fell from their post-February peak. We discuss how high Eli P Carter

strike payer purchases and a very large sell-off could break the StrategistEli.Carter@morganstanley.com +1 212 761-4703

link between Fed policy pricing and 10y yields.

Key Takeaways

Crude oil, Federal Reserve pricing, and 10-year Treasury yields moved back into

lockstep, leaving only a small residual term premium in the 10-year yield.

Estimated 10-year-equivalent 6% payer exposure reached $20 billion in six weeks.

The flow may reflect hedging of construction lending, not a volatility trade.

Dealer hedging is light today, but a 200-basis-point sell-off could mechanically

force sales near half the current duration exposure and amplify the move.

Demand centers on 10-year rates, so a tail sell-off should widen term premium

and steepen 2s10s. The options market would amplify, not initiate, the move.

Maintain 7s30s steepeners at 64bp, target 100bp, stop 50bp. Remote strikes

limit risk; favor positive carry and roll with positive convexity to lower yields.

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