The commodity rally of the past six months has made us all too familiar with the factors to which commodity prices are sensitive - currencies, China, economic growth, peak supplies, even weather.
But what's this new one - government bonds?
Up until a few months ago, it would have been hard to identify any strong relationship between the two. But George Davis, chief technical analyst at RBC Dominion Securities, points out that since May, the two have adopted a pronounced correlation - as commodities have gone straight up, government bond yields have gone straight down.
Blame the greenback
The direction of the correlation defies logic - as well as, to a large extent, history. In general, though the two haven't been tightly correlated, commodity prices and bond yields have tended to move not in the opposite direction, but in the same direction. This is because both reflect economic growth and, by extension, inflationary pressures; when the economy is booming, rates are typically rising, and so is demand (and the price) for raw materials.
But this recent change in the relationship has little to do with the economic cycle. The common link, it seems, is the U.S. dollar.
"People have been paying a lot more attention recently to what the U.S. dollar is doing, and how that relates to the various asset classes," Mr. Davis said.
The dollar and the 10-year U.S. Treasury yield have been following very similar paths, especially since August, when the U.S. Federal Reserve Board first signalled the possibility of another round of quantitative easing (QE). This prospect - eventually confirmed as reality earlier this month - served to depress U.S. interest-rate expectations, which fuelled an exodus from both bonds and the greenback (the two pretty much feed on one another). And, since commodities are priced globally in U.S. dollars, the plunge in the currency sparked a corresponding surge in commodity prices.
Watch those yields
In the past week or so, this new bond-commodity correlation has continued to hold - but with a change of course. Bond yields turned upward and commodity prices turned downward.
Mr. Davis said we're seeing the early stages of "the unwinding of the QE premium," as traders who had overpriced the Fed's easing plans into the bond market and, by extension, the U.S. dollar start to reverse their bets. "The market is trying to normalize interest rates."
We could see this for a while. Whether it's QE or an economic turnaround or growing inflationary pressures, bond yields are sure to eventually head upward from their current historically depressed levels - and they'll likely take the U.S. dollar along for the ride. A rising dollar will pressure commodities lower.
For investors, this means that movements in the U.S. 10-year yield could provide a valuable indicator of which way commodity prices are about to go. If and when the bond yields start to re-inflate, it might be a good time to take profits on those big commodity positions.