Rather than benefiting from lower inflation expectations, Treasurys may actually take a hit from lower oil prices, some analysts believe.
"A fall in the oil price will lower inflation in the near term, which helps to explain the sharp declines in breakeven inflation rates on Treasurys that we have seen in the second half of this year," John Higgins, chief markets economist at Capital Economics, said in a note Monday. "But it will also boost growth significantly, which helps to explain the simultaneous upward pressure on the yields of real U.S. government bonds, i.e. TIPS."
The 10-year Treasury yield was trading around 2.26 percent Tuesday, down from around 2.6 percent at the end of June, while the 10-year TIPS, or Treasury Inflation Protected Security, was trading around 0.54 percent Tuesday, up from around 0.3 percent at end-June. Since this summer, Brent crude oil has fallen from above $115 per barrel to around $66.05 in Asian trade Tuesday, with many analysts predicting prices will continue to slide.
Swifter rate hikes
"The faster growth that results from a lower oil price will cause the rapidly diminishing amount of slack in the U.S. economy to be absorbed even more quickly," increasing the chances of more aggressive tightening from the Federal Reserve, Higgins said. Capital Economics expects the 10-year Treasury yield will climb to 4 percent by the end of 2016.