US Central Banks and Treasury Note Yields

Under pressure
That burns a building down
Splits a family in two
Puts people on the streets
--Queen

Nice chronology of 10 yr Treasury yields. Note the vertical line in 1913 denoting the beginning of the Federal Reserve.

The Fed was not America's first central bank. The First and Second Banks of the United States operated during the first few decades of the nation's existence with the Second Bank losing its charter in 1836. As such, another vertical line denoting the end of our early experiment with central banking could be drawn in the mid 1830s.

It is readily apparent that oft-heard claims of enhanced interest rate stability under central banking regimes are ludicrous in the face of the empirical evidence. The wildest moves in Treasury yields have occurred during periods of central bank governance.

On the other hand, the near eighty year period where the nation was free from central bank control--the period ranging from the mid 1830s until 1913 (with the exception of Lincoln's Civil War years)--saw the lowest volatility in sovereign debt yields in the history of the United States. Moreover, yields trended steadily lower during this period. This is indicative of growing economic strength that caused lenders to view the United States as an increasingly attractive credit risk.

Under central bank regimes, lower yields do not imply the same thing. Central bankers spend most of their time trying to suppress yields. To the extent that they are successful, then rates go down. When central bankers can no longer hold them back, then rates pop higher.

These secular ups and downs are readily evident in the post 1913 Fed period. The Fed's first large scale program to suppress rates came in the early 1920s. This dovish period lasted until the end of WWII. Over the next 30 years, market forces took over. Interest rates went higher despite efforts by the Fed to suppress yields.

In the early 1980s, the Fed regained the upper hand. The subsequent thirty year secular downtrend mirrored and retraced the previous move higher.

So here we are once again--at the bottom of a 30 year suppression program...and with the Fed in the process of losing control of yields...

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