Diesel Now Drives 10-Year Treasury Yields More Than Crude — a First

For the first time ever, 10-year U.S. Treasury yields have correlated more closely with diesel prices than with crude oil — a shift that began in May and signals diesel has become the economy's true inflation driver, according to Energy Aspects co-founder Amrita Sen.

The national average for diesel stands at about $6.277 per gallon, according to AAA, down from its record high of $6.528 but still 71% above year-ago levels. U.S. crude oil is up 56% over the same period. Damage to refining capacity in the Middle East and Russia has squeezed fuel markets far harder than raw oil markets.

What does the price surge mean for the wider economy?

Diesel is a critical input in manufacturing, agriculture and logistics, so the surge has rippled across the economy. The latest consumer and producer price indexes showed jumps in transportation costs. Purchasing manager surveys signaled large spikes in the prices businesses are paying.

Sen laid out the dynamic in a piece for the Financial Times published Wednesday: "This is why products have been trading at double the price of crude during the past few months, something that has never happened before. Ultimately, diesel and gasoline drive inflation, not crude oil."

Crude had long served as a proxy for refined-product costs, but that relationship has broken down, Sen said. "In fact, since May, 10-year US Treasury yields have correlated more closely with diesel prices than crude prices, for the first time ever," she added.

Elevated fuel costs keep inflation forecasts high, and markets are pricing in a more hawkish Federal Reserve ready to hike rates further. Bond yields have risen in anticipation of tighter monetary policy, raising borrowing costs for consumers.

How is the Trump administration responding?

The administration has turned its attention to diesel prices, Sen said. Over the past week, President Donald Trump has taken two concrete steps:

• On Monday, he signed an executive order deferring the 24-cent federal tax per gallon on diesel until the end of the year. Most states levy their own separate taxes on diesel.
• On Friday, he announced a deal with Vladimir Putin to obtain diesel from Russia — a stunning reversal after years of U.S. pressure on Moscow over its invasion of Ukraine.

Under the deal, Russia will supply more than 300,000 tons of diesel now, followed by an additional 500,000 tons in November and 1 million tons "immediately thereafter," according to Trump. Russia will deliver another 3 million tons "within a short period of time" after that.

The announcement shocked observers partly because Trump signed a sweeping sanctions law just last month that imposes steep tariffs on the top buyers of Russian energy.

Why the relief efforts may fall short?

Farmers and truckers say the diesel tax deferral will offer little relief. Per-gallon prices are $2.60 higher than a year ago, while the federal tax amounts to just 24 cents. Energy experts said the Russian diesel deal is also unlikely to make much of a dent.

"It's kind of shuffling deck chairs on the Titanic," Michael Lynch, distinguished fellow at Energy Policy Research Foundation, told the Associated Press. "If we get diesel from Russia, basically it means that their existing customers are not going to get it and they'll have to go somewhere else, and that will keep the price basically where it is now."

Can lower fuel prices still save Republicans in November?

Probably not, according to a new Politico poll. Just 10% of undecided voters said they would be more likely to vote for a Republican if gas prices fell by $1 a gallon. Some 29% said it would have no impact, and 57% didn't know.

The results were similar when voters were asked about an end to the Iran war and a sharp drop in inflation. Even if Trump ended his Iran war or brought fuel prices down sharply, Republicans may see no lift with voters in November.

"There's nothing that Trump can do, and frankly, even if he did something, no one would believe it anyway at this point," one GOP operative working on battleground races told Politico.

With diesel still up 71% year over year and bond markets now keying off the fuel rather than crude, the price of the industrial economy's workhorse fuel — not the White House's supply deals — looks set to remain the binding constraint on inflation, rates and the midterm political calculus.