NCPA - National Center for Policy Analysis

Six Decades of Treasury Yields

April 20, 2012

The path of yields on 10-year U.S. Treasury notes from 1950 to 2012 shows a remarkable degree of symmetry over the 62-year period.  Starting at low rates in the post-WWII period, rates climbed gradually until they peaked in the early 1980s, only to fall again until they reached their current level, says Alex J. Pollock, a resident fellow at the American Enterprise Institute.

  • In both 1950 and 2012, rates reached historical lows of 2.25 percent.
  • Between these dates, 10-year Treasury rates peaked at over 15 percent in 1981 -- a level unbelievable in 1950 and again unbelievable now.
  • A large factor in the rapidly rising yields, leading to the peak in 1981, was the runaway inflation of the 1970s.
  • Conversely, rates gradually dropped off since that peak because of a bull long-term bond market that has, according to Merrill Lynch, returned an average of over 11 percent per year between 1981 and 2011.

Perhaps more surprising is that throughout the period of escalating rates, investors repeatedly believed that the obscenely high rates they were witnessing were at their peak and could not possibly go higher.  This is because they routinely believed successive presidential administrations' promises of debt reduction and budget austerity.

In the current economic climate, the opposite situation is occurring: a diminished and volatile market has driven investors to safe Treasury bonds as a means to protect their savings in unsure markets.  This has driven rates down (a move enhanced by Federal Reserve actions) to the point that investment in the United States government debt yields no real return.

  • While returns fluctuate, they are routinely around 2 percent.
  • Given that inflation seems to be hovering at about 3 percent, the natural conclusion is that investment in Treasury bills is essentially a willingness to take a long-term real loss.

Of greatest concern, however, is the question of where rates will go from here.  There is little more downward space for them to decrease over the next several years, but to increase would defy 30 years of trending.

Source: Alex J. Pollock, "Fearful Symmetry: Six Decades of Treasury Yields," The American, April 4, 2012.

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