The problem of pareidolia and fixed income investing – The Cadiz Perspective

You may not have heard of the word ‘pareidolia’, but it is more common than you may think. It is the psychological phenomenon where the brain perceives familiar patterns – most commonly faces – in random, vague or inanimate objects. We have all ‘seen’ or imagined things in cloud patterns, or in sand, or on the bark of trees, for example. This is quite normal and an indication of visual imagination.

Like how humans are wired to find patterns, even when they don’t exist, a common one is false pattern recognition in yield movements whereby patterns can simply be coincidental, but we then try and make a decision based on this.

So, what’s the issue?

The problem with pareidolia in the investment world is seeing things that that are not really there, or more accurately, misreading market signals, imputing incorrect interpretations and making erroneous investment decisions based on these perceived facts. This is particularly problematic when operating in today’s environment of complex ‘noisy data’. One can over interpret market signals and assign meaning to noise and then take investment decisions based on this noise.

In the investment world and that of fixed income in particular, we maintain a constant watch on issues such as macro signals, geo-political tensions, inflation expectations, and credit spreads. But misinterpreting or more accurately mis-aggregating this data can lead to ‘pareidolia-like’ mistakes.

One example is the ‘false recession signal’ in 2019. Many were predicting a recession because of yield curve inversion, but rather than yield movements, the global recession came about as a result of the Covid pandemic which no one could predict.

Importantly, we must be careful about the way in which we interpret signals in the market and make rushed decisions. We need to look at everything holistically.

So, where are we now and how can we approach it in terms of the fixed income environment?

Globally, we have had downward revisions in growth for 2026 which largely reflects the disruptions from the conflict in the Middle East. There has been local growth factors such as coming off the FATF Grey List and not having blackouts, but our local inflation is critical to the outlook. 

In terms of the yield curve, we believe it definitely still has value, as well as bonds and expect that monetary policy has peaked for now.  

Our conviction says be careful from a duration perspective. We are fully invested in the bond market and two of our funds show this – our Enhanced Income Fund and our Absolute Yield Fund. You can read more on our funds here.

So, returning to the problem of pareidolia and its avoidance – the biggest risk isn’t just being wrong; it’s being confidently wrong because a pattern looks real. The takeaway message is: Do your homework before making big investment decisions!

The information contained herein is for informational purposes only and does not constitute financial advice, a recommendation, or an offer to invest. Past performance is not indicative of future results.