Oil Prices, Price Surprises, and Forwards, Breakevens, and Term Spreads

First, what are current one month and 1 month forward 2 months doing?

Figure 1: One month Treasury yield (teal), one month forward average 2-3 month yield (red), both in %, spot price of oil (WTI) (black), and near month futures (chartreuse), both in $/bbl. Source: Treasury via FRED, EIA via FRED, barchart.com, and author’s calculations.

Notice one month forward average 2 month yields rose with the January CPI release, while the one month yield started rising with the Russian invasion of Ukraine and the commensurate spike in oil prices. That suggests to me that the January CPI release signaled a higher trajectory of Fed funds at the three month horizon, while the Russian invasion sparked a movement even more forward of rate increases.

Figure 2: Five year inflation breakeven, 5 year Treasury minus 5 year TIPS (blue), 5 year breakeven adjusted for both risk and liquidity premia, per DKW (pink), both in %, spot price of oil (WTI) (black), and near month futures (chartreuse), both in $/bbl. Source: Treasury via FRED, KWW per DKW, EIA via FRED, barchart.com, and author’s calculations.

The 5 year inflation breakeven (unadjusted) has moved pretty much in tandem with oil prices, rather than inflation surprises, at least in 2022.

Figure 3: Ten year – three month Treasury spread (blue), ten year – two year spread (red), both in %, spot price of oil (WTI) (black), and near month futures (chartreuse), both in $/bbl. Source: Treasury via FRED, EIA via FRED, barchart.com.

The 10yr-2yr has recovered from its brief inversion, while the 10yr-3mo spread has continued to stay relatively high — the highest since December 2016. What did that inversion mean? The 10yr-2yr did not invert before the last (admittedly unique) recession, while the 10yr-3mo has in each of the last four recession. In my view, historically, the 10yr-3mo spread has been more accurate in predicting recessions (see discussion here), but who knows — perhaps this time might really be different.

13 thoughts on “Oil Prices, Price Surprises, and Forwards, Breakevens, and Term Spreads

  1. rsm

    Why not insure us each against inflation with Fed automatic, continuous indexation, instead of subjecting ourselves to the capricious whims of arbitrary price movements?

    1. Barkley Rosser


      This has now been answered several times. You need it again?

      Pretty much every time this gets tried the upshot is that inflation accelerates in a way that the indexation does not keep up and only adds to the acceleration. It does not work as you claim would. Countries that do it usually end up with either outright hyperiinflatoin or at least very rapid inflation and eventually undo it when they get serious about bringing their inflation rate back down.

      There is a pretty long list of examples of nations that have gone through that with none still doing it. Whom do we see now? Ah yes, Turkey. Oh, they are doing just great. What a role model. Just how stupid are you anyway?

  2. Erik Poole

    Minor quibble: Why WTI? Handy? Brent Crude is still seen as more representative of oil prices faced by consumers.

  3. Erik Poole

    Impending US recession.

    The USA and several European countries are signalling their willingness to take a pound of flesh from the Russians regardless of how this conflicts evolves. If some kind of agreement is reached between Ukraine and Russia, the USA and others have signalled that punishing sanctions will stay in place, regardless.

    The USA and others are promising more sanctions and more restrictions on Russian oil sales. There is zero talk on how to deescalate and end this conflictand then find a stable, durable security arrangement.

    It is really hard not to see how the huge ramp up in commodity prices and the impending US central bank rate hikes puts the US economy into recession by year end or H1 2023.

    At the same time, is seems highly doubtful that oil prices will materially decline between now and the November mid-term elections. Biden’s backroom political strategy boys and girls are taking a seriously risky bet here. One where the USA ends up poorer and possibly far less secure.

    One could argue that the early 1980s recessions were caused in part by US foreign policy (Vietnam, Israel) but this could be the first US recession in my lifetime where foreign policy played the major role.

    American poor on fixed incomes and many American low-income workers will get hammered. In the background, 9% of Americans have no health insurance.

    1. Moses Herzog

      @ Erik Poole
      You have terrific narrating skills, I’m gonna see if I can get you one of those jobs broadcast anchoring bowling competitions. But I’d like to hear what you would have done differently than President Biden, in concrete terms, that would assumably would have put America in a better situation right now. For example, how would you get health insurance for the 9% uncovered. Would you have given Ukraine military jets?? Would you have declared a no fly zone?? Let’s hear the answers from our resident bloviating genius here who let us all know the sky above our heads was currently overcast. Give me some comments to put in bold that sound really really dumb for future reference. Barkley says he doesn’t want me drawing attention to his extreme asinine comments anymore by putting them in bold, so I need new fertile ground here or Barkley’s gonna run out of “Preparation H”.

      1. Barkley Rosser

        Be my guest, Moses. Remind everyone yet again that I reported accurately on what Putin was saying to the Russian people things that Ukraine President Volodomy Zelenskyy believed. Do tell us again how “asinine” Ukraine’s President Zelenskyy is. That is your opinion, right? If I am “asinine” to have reported on what Putin said then Zelenskyy must be so for believing what Putin said. I mean he did believe Putin’s lies. Gosh, I hope he does not run out of Preparation H.

  4. Erik Poole

    @ Moses Herzog.

    Thank you for the gratuitous insults. It is consistent with the behaviour that we have come to expect on Menzie Chinn’s blog. It reflects well on both Menzie Chinn and James Hamilton.

    Why are you and other Americans on this blog so consistently rude, vulgar and disrespectful?

    Answer this question and I will gladly discuss any serious questions you might have.

    1. Moses Herzog

      @ Erik Poole
      Just admit you are a typical Republican coward with no better alternative ideas to what the Biden White House has done. Everyone here already sees you for what you are anyway, so you’d lose nothing stating it “out loud”. BTW, those questions weren’t a serious query of your vacuous mind. Only a test done to prove your inability to “man up”. The lab rat has proven my theory on the lab rat~~carry on.

    2. Moses Herzog

      Readers may or may not recall, Erik Poole is such an “expert” on American politics, he claimed it was progressives and liberals who were stealing Native Americans’ land, not corporations and conservatives who were stealing and dumping chemicals on Native American land. Of course he never gave a single example.

      Similar to Russian “expert” Barkley Rosser, who thinks he can type insane things roughly 1 week before a war starts, Erik Poole thinks that he can type batsh*t things on a blog and no one is going to point that out later:
      Erik Poole December 10, 2021:
      “It is also curious to what extent self-styled liberals and progressives support measures that ‘take’ or continue to take from groups such as North American aboriginals. I can’t say for sure but speculate that social dilemmas and common property conflicts are hard to understand for most.”

      Here we are 4 months later, and infantile Mr. Poole hasn’t mentioned 1 single example of his imagined progressives that are taking or abusing Native American lands. In Mr Poole’s nutjob frame of mind It’s not TransCanada Energy that’s wanting to spew petrochemicals all over the Dakotas, it’s Natalie Landreth.

  5. Erik Poole

    @ Moses Herzog

    Thank you Moses. QED.

    Thanks for making me feel young again. Like I was in junior high school all over again. Except where I grew up, you behaviour would stand out even in junior high school.

    What I really admire about you is your penchant for making up stuff and lying about it just like the Trump Republicans. In that respect, you Americans are definitely finding common ground.

    1. Moses Herzog

      @ Erik Poole
      Still no answers on what you would do. What a “surprise”. Come on, let’s hear it from our resident geopolitical expert. We want all the magic answers on how Biden could have done it better. See, it’s interesting you talk about high school kids. Because if an 8 year old made fun of an adult for how they swung a baseball bat, even most 8 year olds would swing the bat if the adult challenged them to show how it was properly done. You on the other hand cry like a snowflake and tell the adult they were being mean to you.

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