There's a 'dramatic decoupling' in the markets

One of the closest relationships in the markets is falling apart, and Janet Yellen may be to blame.

According to Andrew Garthwaite, global-equity strategist at Credit Suisse, the price of oil and US Treasury yields have traditionally moved in close concert. Over the last few weeks, however, that has not been true.

"There has been a close correlation between inflation expectations and bond yields over the past 2 years and, historically, troughs in oil prices have coincided with troughs in nominal Treasury yields," wrote Garthwaite in a note on Tuesday. "The very unusual aspect of recent market moves is that oil is up 56% over the last 3 months, and US bond yields are down 20" basis points.

This doesn't just apply to oil. The note highlighted five such "dramatic decoupling" trends between bonds and other assets, but oil has been one of the most important assets in the market this year, making the trend notable.

"The unusual aspect of recent quarters has been that the change in the oil price and the change in TIPS yields has been inversely correlated (i.e. as the oil price has risen, real bond yields have fallen)," said the note.

"The TIPS yield has also disconnected from US macro surprises, declining through most of 2016 even as macro momentum in the US has recovered (although we would note that this reverted recently with US macro surprises falling and the TIPS yield starting to pick up)."

The through line here is that as oil and macro data improving would indicate that the economy is getting stronger. Yields also generally rise as the economy improves.

To Garthwaite this means that something has to change. Either yields increase as the stronger oil market and economy cause investors to sell bonds, or oil prices crash down to yield levels.

To his mind, Garthwaite believes that Treasury yields are most likely to move upwards to be closer in line with oil and macro data saying that "this anomaly between bond yields and cyclicals will be resolved by a rise in yields."

And the reason for this shift? Janet Yellen and the Federal Reserve.

"In our view, the most important explanation is Janet Yellen, whose language became more dovish as markets, [purchasing manager indexes] and financial conditions all improved," wrote Garthwaite. "As a result, the market is now pricing in around one rate rise this year, while our economists expect two rate hikes this year."

With the bond market digesting lower expectations for rate hikes going forward, there is a certain cap on how high Treasury yields are likely rise unless the Fed surprises with a rate hike.

And so one of the closest market correlations is forced into a divorce.