Raad Mahmoud Al-Tal

For the first time in 36 years, the relationship between oil prices and US Treasury bond yields has returned to historically high levels. According to The Financial Times, the correlation between West Texas Intermediate (WTI) crude oil prices and the yield on 10-year US Treasury bonds reached around 65 per cent this month. Estimates suggest that every $1 increase in the price of a barrel of oil is associated with a rise of about 0.02 percentage points in the bond yield.

This relationship shows that oil prices and bond yields often move in the same direction. However, this does not necessarily mean that higher oil prices directly cause bond yields to rise. Both may be affected by common factors, such as inflation expectations, economic conditions, and geopolitical tensions.

The same pattern has been seen in European bond markets. Countries that depend heavily on imported energy have faced rising bond yields as oil prices have increased. Oil is a major driver of inflation because higher energy prices raise the cost of production, transportation, and distribution. These costs eventually affect the prices of many goods and services. As a result, financial markets have become more sensitive to changes in oil prices, especially amid tensions in the Middle East and concerns about the supply of crude oil and refined products.

The impact goes beyond financial markets and directly affects households and businesses. Higher oil prices increase living costs, while rising bond yields can make borrowing more expensive. The yield on 10-year US Treasury bonds is an important benchmark for pricing many long-term financial products, including mortgages. When this yield rises, borrowing costs may increase for households and businesses. If inflation remains high while economic growth slows, the global economy could face a greater risk of stagflation, a situation in which prices continue to rise while economic activity weakens.

For Jordan, the combination of higher oil prices and rising US Treasury yields presents a particular challenge. As a country that imports much of its energy, Jordan faces a higher import bill when oil prices rise. This can increase transportation and production costs, push up prices, and reduce consumers' purchasing power. At the same time, higher US Treasury yields may increase borrowing costs in international markets, making it more expensive for Jordan to obtain new loans or refinance existing debt. These pressures can widen the current account deficit, place additional strain on public finances, and make it harder for businesses to invest and expand.

The challenge for Jordan is not only the size of its public debt, but also the cost of servicing it. If oil prices remain high and global borrowing costs increase, the government may face pressure from both a higher energy bill and more expensive financing. This could leave less room in the budget for public investment and development projects. For this reason, public debt management should focus on the timing of repayments, borrowing costs, and exposure to interest rate changes.

At the same time, Jordan needs to reduce its exposure to external shocks by diversifying its energy sources, increasing exports, attracting productive investment, and improving productivity. These measures can help the economy generate more domestic income and foreign currency, reducing its dependence on borrowing and imported energy.

The key point is that Jordan cannot control global oil prices or US Treasury yields, but it can strengthen its ability to withstand their effects. A more productive economy, stronger exports, and better debt management would help protect public finances, support investment, and sustain economic growth even when global financial and energy markets become more volatile.