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Rates Flash Danger for 60/40 Portfolios With Shrug at Stock Rout

Rates Flash Danger for 60/40 Portfolios With Shrug at Stock Rout

For signs that traditional investment strategies are breaking down with Treasury yields hovering near record lows, look no further than Wednesday’s market action.

Amid the worst rout in almost four months in the S&P 500 Index, Treasuries registered little more than a shrug, failing to extend their rally since the end of last week. A similar breakdown in the inverse correlation between equities and bonds took place last month and Wednesday’s market moves may suggest this is a new normal, potentially reinforcing investors’ angst about the viability of the popular 60/40 portfolio mix.

Though the S&P 500 fell more than 3% on Wednesday, Treasury rates across the curve barely budged. That’s drawing comparisons to the equities selloff that took place over much of September, which produced what JPMorgan Chase & Co.’s John Normand has called a “highly abnormal” and “worrisome” failure of 10- and 30-year Treasury bonds to rally.

Rates Flash Danger for 60/40 Portfolios With Shrug at Stock Rout

“There’s not a lot of gravitational pull toward Treasuries, which don’t yield very much,” said Tom di Galoma, managing director of government trading and strategy at Seaport Global Holdings. “No one wants to buy them here at these levels, unless you have to.”

Busy Stretch

Granted, there’s plenty going on at the moment to leave investors wary of chasing yields ever lower right now.

For one thing, the 10-year Treasury yield, a benchmark for global borrowing, is down by around 10 basis points from Friday’s four-month high. At 0.77%, it’s barely a quarter-point above its record closing low.

There’s also a spate of Treasury-note auctions to absorb this week. And Thursday will bring a policy decision by the European Central Bank and a U.S. report on third-quarter growth that’s expected to show a huge rebound.

Moreover, a couple of technical factors are in play. Large volatility structures placed in 10-year options over the past week have created a dynamic in which bond selloffs will be bought and rallies sold.

Finally, the Nov. 3 U.S. election is also looming large. Subadra Rajappa, head of U.S. rates strategy at Societe Generale SA, says investors see a likelihood that the vote produces a big boost in fiscal stimulus that pushes up long-end yields, which explains the lack of big flight-to-quality trades on Wednesday.

©2020 Bloomberg L.P.