Interest Rates: 60-Year Cycle

Posted by Tom McClellan via The Big Picture

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Interest rates 1790-Present

This chart of 10yr Treasury yields since 1790 is from Doug Kass at Real Money.

Dougie notes “The only time that yields have consistently been below current levels was WWII — 1941-44 — and and immediately after, to 1951, when the U.S. enforced a ceiling on yields. Even during the 1930s when the great Depression contracted the economy 25%, deflation drove yields to 2.5-4.0%.”

The Baby Boom started in 1946, and continued through 1964.  Boomers saw their first instance of a financial bubble in the 1970s when gold was finally released from its permanent fix to the dollar, and was allowed to float.  It went from $42 to $900 in a decade, then collapsed throughout the 1980s.

After the gold bubble of the 1970s, Boomers and others swore they would never get caught up in another bubble in something as frivolous as gold.  No, no, from now on they would only invest in things that actually had earnings, like technology stocks.

After the Internet bubble hit its peak in 2000, Boomers swore they would never invest in something ephemeral like Internet stocks.  From now on, they would stick to something safe, something real, like real estate.

And now, after the 2007 peak of the real estate bubble led to a collapse of the stock market and a deep economic slowdown, Boomers are again making resolutions to never again get caught up in something so speculative.  No, no, from now on, Boomers are deciding to stick to something safe, something like bonds.  After all, people are supposed to invest more in bonds when they get older, aren’t they?

The problem is that the Baby Boomers are such a large group that whenever they all try to crowd into the same room, their combined weight is more than can be balanced by the rest of the investing public.  So having Boomers all decide that bonds are the place to be creates some interesting disruptions in the financial markets.

And this new investing fashion that has Boomers piling into bonds arrives just as interest rates are nearing the bottom of the 60-year cycle in interest rates.  One important point to remember is that bond yields move inversely compared to bond prices.  So seeing bond yields fall like this is another way of saying that bond prices are rising. 

This week’s chart looks at the history of high grade corporate bond yields, which date back as far as 1768 in the data set previously compiled by the Foundation for the Study of Cycles (FSC).  Since 1919, Moody’s has been tracking the average yields on various categories of corporate bonds, so the older yield data has been stitched together with Moody’s more modern data.  Going back to periods before 1919 is a bit more problematic, since the data are harder to access and since definitions of things like “stocks” and “bonds” were somewhat looser in the 1800s than what we think of today.

Courtesy of McClellan Financial Publications
via the Big Picture

The McClellan Market Report and its companion Daily Edition are produced by Sherman McClellan and Tom McClellan. Both are technical analysts and educators whose innovative insights have helped countless investors succeed.

The McClellans’ work has been repeatedly quoted in Barron’s, and their market timing signals have ranked them in the top ten timers for both intermediate and long term by Timer Digest.

Tom McClellan
Tom McClellan is the editor of both The McClellan Market Report and The Daily Edition. Tom is widely sought as a lecturer, and his market timing signals have helped him be repeatedly ranked high by Timer Digest. For the 10 year period through 2006 Timer Digest rated him No. 1 for Gold Timing and No. 4 for Stock Market Timing. He was also Bond Timer of The Year for 2005.