One thing I constantly hear is “interest rates only have one direction to go – UP!” There’s this myth that t-bond yields and interest rates in general just have to go higher. But history does not prove this at all. In fact, history tells quite a different story.
The chart below helps put things in perspective. Since 1871 US Treasury Bond yields have averaged 4.3%. Today’s rates of 2.8% are certainly lower than that, but not at record lows. We’re still about 1% off those levels seen at several points in the past 125 years.
It’s also interesting to note that the high rates of the 70’s are a substantial anomaly in the data. It looks like many are suffering from a case of recency bias here. And by recent, I do mean the 70’s. That’s not entirely inappropriate given the long duration of these bonds, but when one steps back and reviews the true long-term history of bond yields the current environment looks much more benign than most imply.
(Chart via Hoisington)
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
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