The Long View On U.S. Government Bonds

Includes: DLBL, TBF, TBT, TLT
by: Cullen Roche

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 70s 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 70s. 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)

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