What the current yield curve says, and what the future prices of energy do

Policymakers have always looked at the difference between the yields on long- and short-term Treasury securities as an indication of where the economy is heading. In this study, we extend the literature by examining the yield curve's ability to predict the short-term prices of crude oil and other energy products. Using linear and non-linear (parametric quantile) causality tests on daily data from 1986 to February 2020, our findings confirm that changes in the yield spread not only correlate with, but also drive the returns on crude oil, heating oil and natural gas in the short run. This short-run relationship is relatively absent from 1986 to 2003. However, since 2004, the relationship has remained quite strong, confirming that these products have been financialized. Market participants and policy makers may find our findings useful in understanding the nature of relationship between the shape of the term structure and future innovations in energy prices.