Cointegration between oil and bond yield? Not!

An article in the Feb 1 issue of the Economist magazine suggested that there may be a link between crude oil price and long-dated US treasuries. Their reasoning is that if oil price is high, OPEC will need to re-invest the pile of cash that they generate, and eventually a lot of this ended up invested in US 10-year bond. Therefore, when crude prices go up, 10-year yield should go down. As I explained before, the fact that these 2 numbers are anti-correlated do not prevent them from being cointegrated. And in fact, the Economist article plotted the crude oil prices together with bond yield over the last year together, and they seem tantalizingly close to being cointegrated.

My curiosity piqued, I proceeded to get a longer history of these data to examine.

In the graph above, I plotted the (normalized) difference between the 10-year treasury yield and oil price. One can see that over the last year and a half, they are indeed cointegrated to a good degree. (To see that, notice the spread is range-bound, or mean-reverting, from mid-2005 to the present.) But this relationship breaks down completely over the longer history.

Though I think that the Economist magazine is doing a disservice to its readers for plotting this graph over just one year and making innuendos of linkage, it is a nice illustration of the danger of studying cointegration over a short window.