Behind the Bond Boom No One Saw Coming

I agree with both of those culprits. Looking back, I was too convinced that Fed Chair Jerome Powell would hold policy steady through trade tensions to avoid the appearance of backstopping President Donald Trump's standoff with China.

In late April, I wrote that bond traders went overboard on their rate-cut bets. In May, I still thought the Fed was committing to an aggressive pause, and in June I wrote that the market was seeing dovish signs that weren't necessarily there.

Of course, the Fed dropped its lending benchmark by a quarter point in July and did so again in September and October.

But aside from parsing Fedspeak, it's the following takeaway from Cudmore's retrospective that might be the most important of all, and why 2020 could most likely be another year of ever-shifting expectations: "Perhaps the broader lesson from all our asset forecasts was a lack of ambition. We fell into the common trap of anchoring our predictions in today's ranges, and not realizing how far things could run once a move started."

Across Wall Street, strategists are doing the exact same thing for 2020. Consider the 10-year Treasury yield for example, which is set to end 2019 around 1.9%. Aside from outliers at Citigroup and Societe Generale, analysts at other primary dealers see the yield in a tight window of 1.5% to 2.25% in 12 months' time.

As for high-yield debt, analysts are forecasting a total return between 1% and 7.5%, which equates to fairly benign price swings given the securities' large interest payments. The median annual return on the Bloomberg Barclays high-yield index since 1984 is 7.5%.

I wrote earlier this month about the bold call for 10-year yields from John Dunham. He sees inflation rapidly picking up in the first half of 2020, freaking out the Fed and forcing policy makers to raise interest rates again.

Then, toward the end of the year, he sees the U.S. tumbling into a recession. That's how the benchmark Treasury yield rises past 3% come September and drops to a record low 1.3% by mid-2021.

Is that precise sequence of events — and ensuing wide price swings — likely to play out? I'm not so sure. It certainly stands in stark contrast to BlackRock's three overarching ideas for 2020: "modestly positive on risk assets," "neutral on global duration and cash" and "cautious cyclical rotation."

Don't get me wrong: Strategists at the world's biggest money manager have sound reasoning for those views. But they risk falling into the same trap that snared Wall Street in 2019.

One idea BlackRock and Dunham agree on: The risk of accelerating inflation is underappreciated in markets. That might be the one thing that could most quickly reverse 2019's bond boom.

The median forecast of 61 analysts surveyed by Bloomberg calls for the 10-year U.S. yield to end 2020 at 1.94%, just about where it is today. If longer-term yields were forced to move higher in a hurry, that would cause a lot of pain across fixed-income assets.

The future, it turns out, is often quite difficult to predict. As the 2020s begin, perhaps it's best to borrow a page from the Fed's 2019 playbook: Take your best shot at forecasting the road ahead, but don't hesitate to react to important new information.

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