Has COVID killed the bond market?

Good morning, Bull Sheeters. Investor exuberance over President Trump’s truncated COVID convalescence is already beginning to fade—investors are a tough crowd—as U.S. futures struggle to cling to yesterday’s gains.

In a video address from the White House, Trump told America, “get out there, be careful.” Judging by the markets today, they’re taking the “be careful” message to heart.

Let’s see what’s driving markets.

Markets update

Asia

• The major Asia indexes are mixed in afternoon trading, with Hong Kong’s Hang Seng the best of the bunch, up 0.8%.
• According to the World Health Organization, nearly one in ten people on the planet have already been infected by the coronavirus. If correct, that would be 20 times the number of known confirmed cases.
• Alibaba will acquire up to a 10% stake in Dufry that will expand the Swiss duty free group’s footprint in Asia.

Europe

• The European bourses are awash in red with Germany’s Dax down 0.2% two hours into the trading session.
• Adding a no-deal outcome to Brexit trade talks on top of a pandemic would be nothing short of “irresponsible,” warns Germany’s Foreign Minister. Meanwhile, the talks wind on with little progress.
• The Russian ruble has been one of the casualties of Trump’s slide in the polls in recent days. After falling a staggering 9% in the past three months, the Russian central bank is forced to freeze interest rates.

U.S.

• U.S. futures point to a negative open. They’ve been losing ground all morning. That’s after an impressive tech-led rally on Monday lifted the three major exchanges.
• A number of polls showing Democrat Joe Biden with a widening lead—reminder: these are polls; add salt—should lower market volatility, Wall Street is saying. Anything but a drawn-out, contested election would be good for stocks, CitiGroup and JPMorgan Chase say.
• Shares in biotech firm MyoKardia jumped 58% on Monday after Bristol Myers Squibb agreed to buy the heart-care specialist for $13.1 billion.

Elsewhere

• Gold is down, trading around $1,915/ounce.
• The dollar is up slightly.
• Crude is up a tick, with Brent trading around $41.50/barrel.

***

Time to ditch the 60/40 rule?

There aren’t too many investment pros advocating the old 60/40 stocks/bonds allocation strategy these days.

That’s too bad. The strategy made sense for years. The idea of investing roughly 40% of your money in bonds and the rest in equities gave you the upside of a surging stock markets when times were good and the safety net of bonds when the rally faded.

Such logic would suggest that in times of recession or political uncertainty, stocks should fall and bond values should rise. In other words, in times like now bonds would be a nice safety cushion—a plan B for your portfolio.

But that’s hardly been the case in 2020.

Market observers figured last month we’d finally see bonds rebound as equities faltered. What happened instead in the bond market?

Crickets.

“As equities sold off, US Treasurys remained anchored,” Goldman Sachs wrote in a recent investor note. “Yields ended the month essentially unchanged as the MOVE Index, a measure of bond market volatility, fell to an all-time low. Although the Federal Reserve’s extraordinary policies kept short-term rates pinned, the behavior of long-term rates has been confounding, showing no sensitivity to shifts in economic news, vaccine-related headlines or the changing narrative on further fiscal stimulus.”

The 10-year/two-year Treasury yield curve is the big indicator to watch. It usually climbs in times of great volatility, as the next Goldman chart shows:

The grey-shaded bars represent times of recession. During those years, the 10-year-two-year yield curve typically climbs to at least 150 basis points. But it’s frozen at the moment, down at a level of roughly 50 bp, which tells Goldman that, among other things, bonds won’t come to the rescue of investors in the near term should America enter a double-digit recession or a constitutional crisis.

It’s one of those recession playbook indicators that have broken down during the pandemic.

It’s not the only one.

***

Have a nice day, everyone. I’ll see you here tomorrow. 

Bernhard Warner
@BernhardWarner
Bernhard.Warner@Fortune.com

As always, you can write to bullsheet@fortune.com or reply to this email with suggestions and feedback.

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