Oil and Treasuries

by Jay Pestrichelli on June 21st, 2012

Here’s an interesting chart I stumbled upon today that shows the last 5 years of Brent Crude Oil prices and IEF, the iShares 7-10 year Treasury Bond Fund ETF.
Despite the volatility of oil, it appears to trace along the price of the treasury based fund. However, the last month shows more of a divergence than a correlated move with oil showing a notable underperformance. Do we smell opportunity here?

For those of us already bullish on energy, this chart reminds us that this sector can snap quickly from up to down and vice versa. I’m sure we all remember the move of Brent in the $140’s of July 2008 to $35 that same December.  That movement showed a whipsaw vs. treasuries that eventually came back in line.

The Fed reiterated its intention to keep interest rates low through 2014, so bond funds like IEF should hold its elevated levels (give or take some movements). This may provide the bar which oil will need to recover to and by my eye it looks like its closer to the wider part of the price divergence than the narrow.

Historically these two assets required stocks as the go between to define the relationship. But recently oil and treasuries have made their own news and stocks are more of an afterthought, so charting these two side by side may be a new way to look at them.

Being hedged allows us to weather the storm of oil’s disappointing performance and charts like this can give Buy and Hedge investors the confidence that their discipline will pay off. If the US recovery can get some legs, we’ll see energy back on the rise and positions in ETFs like XOP and XLE will deliver profits.

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