Hoisington Investment Management recently released its latest quarterly letter, penned by president Van Hoisington and economist Lacy Hunt.
The authors look at three episodes of financial panic in history that followed large builds in debt and they conclude, based on historical experience and recent academic studies, that bond yields don’t typically hit their lows until 14 years after the crisis actually happens.
Hoisington and Hunt write in the letter:
In the aftermath of all these debt-induced panics, long-term Treasury bond yields declined, respectively, from 3.5%, 3.6% and 5.5 % to the extremely low levels of 2% or less in all three cases (Chart 2). The average low in interest rates in these cases occurred almost fourteen years after their respective panic years with an average of 2%. The dispersion around the average was small, with the time after the panic year ranging between twelve years and sixteen years. The low in bond yields was between 1.6% and 2.1%, on an average yearly basis.
Here is the chart showing the long march to low yields:
Hoisington and Hunt compare these historical episodes to the current economic situation today, saying it’s seems likely that we follow the historical path to lower interest rates:
Amazingly, 20 years after each of these panic years, long-term yields were still very depressed, with the average yield of just 2.5%. Thus, all these episodes, including Japan’s, produced highly similar and long lasting interest rate patterns. The two U.S. situations occurred in far different times with vastly different structures than exist in today’s economy. One episode occurred under the Fed’s guidance and the other before the Fed was created.
Sadly, there is no evidence that suggests controlling excessive indebtedness worked better with, than without, the Fed. The relevant point to take from this analysis is that U.S. economic conditions beginning in 2008 were caused by the same conditions that existed in these above mentioned panic years. Therefore, history suggests that over-indebtedness and its resultant slowing of economic activity supports the proposition that a prolonged move to very depressed levels of long-term government yields is probable.