The very rapid decline in safe haven bond yields in recent months has taken me somewhat by surprise. Although we at Seneca have been preparing for a downturn in 2020 for some time, I had been expecting economies and thus bond yields to remain firm for a little while longer, and therefore to be able to buy safe haven bonds on what I had hoped would be decent valuations ahead of the end of the cycle. As it is, the bond rally started in November when real yields globally were at -0.4%, which hardly represented good value; they are now at -1.0%.

 

The decline in yields can be attributed to changing expectations for future monetary policy. Equity markets across the globe fell sharply in the fourth quarter, sending the clear message that monetary policy was too tight and thus threatening growth. In January, the Fed and other central banks began to reverse their collectively hawkish stance and have not looked back since. This has resulted not only in plummeting bond yields – an indicator of expectations of looser monetary policy ahead – but also rampant equity markets.

 

The question is, will a bit of loosening prolong the cycle further, or is economic growth now in an unstoppable downward spiral as usually happens when a cycle ends?