Most Recent Stories


Interest rates have moved a whopping 20 bps in recent weeks and the bond bubble theorists are ready to pop the champagne.  Not so fast there.  In trying to put this into perspective I did a little research looking at the only period in US history when bond yields were this low and the macro environment was even remotely similar.  If you hop in your time machine back to the 1930’s the environment was eerily similar.  Deflation risks abound, low yields, floundering economy, high unemployment, private sector debt bubble, etc.

It’s impossible to say what year we most highly correlate to in the 30’s.  Some people think we’re in the early 30’s while others think we’re in the late 30’s, but one thing is clear – the interest rate environment is remarkably similar regardless of where you think we are:

So what happened back in the 30’s?  The economy muddled through until WW2 or so and then started to pick up momentum.  Interest rates steadied and then rose a whopping 1.5% over the course of the next 20-30 years depending on where we begin.   And that’s including the New Deal period when government spending was 120% of GDP!   Sound familiar?  I’m sure the deficit hawks were puking all over themselves at the time of FDR’s outrageous spending spree.

The greatest irony in all of this hysteria is that those who are shrieking the loudest about rising yields, US government default, etc fail to understand why interest rates would likely rise in the current environment.  Despite massive debt levels, private sector de-leveraging, deflation risks, etc the only thing that got interest rates moving higher in the 1940’s was an economic recovery!

Comments are closed.