March 2020 — three rate cuts in 23 days

Most discussion of interest rates assumes a measured pace — a quarter point at a scheduled meeting, telegraphed weeks ahead. March 2020 is the counterexample, and it is worth keeping in mind whenever a plan depends on having time to react.

The three cuts

Effective	Policy rate
4 March 2020	1.25%
16 March 2020	0.75%
27 March 2020	0.25%

Three moves in twenty-three days, two of them unscheduled. A full percentage point removed from the policy rate in under a month.

Prime followed within days each time: 3.45% on 11 March, 2.95% on 18 March, 2.45% on 1 April. It then sat at 2.45% for nearly two years — the long low plateau that made borrowing to invest look so appealing right up until prime tripled between 2022 and 2023.

What it meant for income portfolios

The rate collapse was the visible event. It was not the one that mattered most.

For a dividend investor, the significant thing about early 2020 was the divergence between kinds of payers. Distributions did not move as a block. Some held completely, some were trimmed, some were suspended outright — and the split fell along lines that were largely predictable in advance.

The pattern, stated structurally rather than by naming names:

Payments backed by regulated or contracted revenue held up best. Utilities and businesses with rate-regulated or long-term-contracted cash flows kept paying, because their revenue was not a function of the month’s economic activity.

Payments dependent on cyclical revenue came under the most pressure. Businesses whose income tracked commodity prices, discretionary consumer spending, or occupancy had the least room to maintain a payment when that income fell.

Payout ratio mattered more than yield. A modest yield well covered by earnings survived. A high yield that consumed nearly all of earnings had no buffer, and a buffer was exactly what was required.

Structures with a fixed obligation ahead of the distribution were the most exposed — leverage in particular, because interest is contractual and distributions are not.

The order things happen in

Worth being precise about, because people expect it in the wrong sequence.

The unit price does not fall after a cut is announced. It falls before, as the market prices in the probability of one. By the time a cut is confirmed, most of the decline has already happened.

The practical consequence: you rarely get a warning you can act on. A high yield created by a falling price is frequently the market’s forecast of a cut rather than an opportunity somebody missed. Selling into it after the announcement means selling after the damage.

What the episode actually teaches

Three things, none of them about interest rates.

Conditions can change faster than a plan can be adjusted. Twenty-three days from a normal environment to an emergency policy rate. Anything requiring you to react in time would have failed.

Correlated risks arrive together. Prices fell, some distributions were cut, and anyone leveraged faced rising collateral pressure at the same moment. The spread arithmetic treats these as independent. They are not.

Diversification across sectors did more work than diversification across holdings. A portfolio of eight names in one cyclical sector was concentrated regardless of the count.

What held up

Not a recommendation, an observation about that period: the payers with long records of maintained or increased distributions largely maintained them again, and the ones with high yields relative to what they earned were disproportionately the ones that did not.

That is a general regularity rather than a rule, and there is no guarantee it repeats. But it is the argument for judging an income holding on coverage and record rather than on the current number — the case for which is much easier to make with a concrete instance of what happens when conditions turn.

Living off dividends in Canada covers modelling a 20% distribution cut into a drawdown plan, which is not pessimism — it is roughly an ordinary recession.

Rate figures transcribed from the Bank of Canada’s published series.