If oil prices don't fall, U.S. Treasury yields won't peak

When will US Treasury yields peak? This is currently one of the hardest questions to answer in the market. The latest quantitative cross-asset research from Citi shows that a retreat in oil prices is almost a necessary precondition for US Treasury yields to reach a peak. However, ongoing geopolitical tensions are keeping oil prices elevated, suggesting that the ultimate peak in yields may not yet have arrived.

According to Chasing Wind Trading Desk, Citi’s report finds that a decline in front-end breakeven inflation rates and oil prices are historically the most reliable leading indicators for predicting a peak in US 10-year Treasury yields. However, breakeven inflation rates are currently rising rather than falling, and the US Dollar Index (DXY) has also resumed its upward trend recently. Both point to yields not yet having peaked. Meanwhile, signals such as the widening of high-yield credit spreads and the underperformance of cyclical stocks relative to defensive stocks are consistent with characteristics observed after yields peak, resulting in a conflict among current signals and making directional judgment extremely challenging.

At the asset allocation level, Citi’s cycle model is currently following a "late-cycle" strategy—underweight equities and credit bonds, overweight bonds (excluding US Treasuries) and commodities. The global macro strategy team remains neutral on duration, tending to favor the yield spread between the ECB and the Fed, and prioritizes stocks over credit bonds.

Oil Price Is a Necessary Condition for Yields Peaking

Citi’s quantitative global macro strategy analysts Alex Saunders and Vinh Vo reiterated their cross-asset analysis framework in the latest report, adding three sell-off ranges in rates exceeding 70 basis points, while their core conclusions remain largely unchanged.

Historical data shows that before the US 10-year Treasury yield peaks, cross-asset performance demonstrates distinct leading and lagging patterns. Notably, front-end breakeven inflation rates typically fall one to two months before the yield peak, and an oil price peak is nearly a necessary precondition for yields to peak. In contrast, the 2-year real rate often continues to rise even after the yield peak, making it a lagging indicator.

Currently, the trend of strengthening breakeven inflation rates has emerged, but the key “decline” signal has yet to appear. Citi points out that ongoing geopolitical uncertainty is keeping crude oil prices high, making the timing of an oil price peak difficult to determine. Against this backdrop, any predictions for the yield peak need to be further postponed.

Which Signals Are Valid and Which Are Not

Citi’s research systematically reviews commonly used market indicators and clearly distinguishes which have leading significance and which may mislead decisions.

For valid signals, the flattening of the 5-year to 30-year US Treasury yield curve (5s30s) usually appears about a month before the peak, but this trend has reversed in the past 25 trading days, making the signal less clear. The widening of high-yield credit spreads and the relative outperformance of low-default-risk equities are also aligned with the historical pattern of yields peaking. Moreover, Quality stocks tend to perform strongly within a 200-day window before and after the peak in yields, which has recently been observed; in contrast, Growth stocks typically peak ahead of the yield peak and continue to underperform thereafter.

As for invalid or lagging signals, Citi explicitly notes that both core CPI and headline CPI year-on-year numbers are lagging indicators. The recent hotter-than-expected CPI readings do not rule out the possibility that yields have already peaked. Similarly, the 2-year real rate will not reverse at the turning point of yields. The VIX index offers virtually no reference value for timing yields, but historically it tends to decline after peaks are confirmed.

Current Signals Are Contradictory

Citi admits that, after comparing current market dynamics with historical patterns, the resulting signals are clearly conflicting, making it difficult to form a definitive directional judgment.

On the one hand, the performance of cyclical stocks relative to defensives has weakened for 2 to 3 consecutive months, and high-yield credit spreads are also widening — both of which are in line with market characteristics after yields have peaked. On the other hand, breakeven inflation rates are still strengthening, the US Dollar Index has recently resumed its upward trend, and oil prices remain supported by geopolitical factors — all suggesting that the ultimate peak in yields may still lie ahead.

Citi believes that if geopolitical situations show positive progress—especially after the upcoming US mid-term elections—it will significantly increase the probability of an oil price peak, thereby creating conditions for a sustained pullback in US Treasury yields. Until then, the near-term trajectory of yields will remain highly uncertain.

Within this judgment framework, Citi’s cycle model has switched into "late-cycle" mode. Specifically, the model underweights equities and credit bonds, overweights bonds (excluding US Treasuries) and commodities, and has recently further downgraded stocks to underweight. The global macro strategy team remains neutral on overall duration, prefers the ECB-Fed rate differential from a rates strategy perspective, and prioritizes equity exposure over credit bonds. The core logic of this allocation is: as long as yield peak signals are unclear and neither oil prices nor breakeven inflation rates have shown decisive declines, maintaining a neutral rather than aggressively long position on US Treasuries is the more prudent approach.