Oil prices and US Treasury yields are locked in their tightest relationship since 1990, driven by Middle East conflict concerns. The correlation between West Texas Intermediate crude and the 10-year Treasury yield reached 65 percent this month, approaching the 66 percent peak set during the first Gulf war. This dependency highlights how global economic outlook and major asset classes rely on Strait of Hormuz traffic, through which 20 percent of world oil exports pass.

Energy price shocks have forced investors to rethink market approaches, pricing in higher inflation and interest rates. Bond investors have shifted focus from microscopic economic data to acting as oil traders. Each extra dollar on a barrel of WTI translates to almost 0.02 additional percentage points on the 10-year yield.

Oil benchmarks have swung wildly between over $100 and about $70 per barrel amid conflict prospects. The US 10-year yield, a benchmark for trillions in assets, has soared to its highest level since 2007. Fed chair Kevin Warsh recently stated inflation remains too high, prompting traders to bet on further rate hikes.

As central banks grapple with above-target inflation, energy prices are increasingly seen as the last straw. Investors say economic fundamentals have taken a back seat to oil as a driver of bond prices. If the pattern holds, where yields go will be less dependent on the Fed and more on the situation in Iran.

For Europe, soaring gas prices have been closely watched given their importance to household inflation.