Quarterly Review and Outlook

Real Treasury Bond Yields

Real Treasury bond yields fell into deeply negative territory in 2021. In elementary economic models, this event, taken in isolation, would qualify as a plus for economic growth in 2022 and would be consistent with the strength indicated by fourth quarter 2021 tracking models. In theoretical discussions in introductory and intermediate economic texts, economic relationships are explained under what is known as the ceteris paribus condition, where only one variable is moving while all others are being held constant. An economy has many moving parts however and is more precisely described by the phrase mutatis mutandis which means that all the variables are moving at the same time. With this in mind, the negative real yields of 2021 add to the already numerous economic headwinds for 2022.

This assessment is based on four considerations. First, the history of negative real yields for the past century and a half indicates that the downward risk to economic activity is significant, a sharp contradiction to the importance of economic gains in late 2021. Second, the theory of real interest rates and how they are determined confirm the historical analysis. Third, historical analysis indicates that negative real yields, combined with extreme over-indebtedness are an even greater negative for growth as is confirmed by scholarly research. Fourth, increasing obstacles to growth will encourage subsiding inflation.


Real 30 year Treasury yields averaged a negative 2.3% in 2021, the lowest annual average since the recessions of the early 1980s. While not unprecedented, negative real yields at this level are extremely rare. Since 1870, the starting point of reliable data, only 24 full yearly averages were negative, or just 16% of the 152 readings over this time span. Detailed parsing of the series reveals that 12 of those occurrences fell in the spans from 1914 to 1920 and 1939 to 1953, both of which were dominated by major military engagements and their subsequent demobilization – World Wars I and II and the Korean War. The World Wars began in Europe and Asia prior to the U.S. entry, but our initial noncombatant status gave the U.S. a major economic boost that was in no way cyclical. The start of the Korean War and the end of World War II were four years apart, but the interest rate controls that were initiated in 1942 continued into the 1950s and the Korean War ended in 1953. Thus, the War years should be excluded since one of the most critical issues for the economy is not just extreme over-indebtedness, but the length of time that the high debt levels are sustained. Academic research has focused on high debt levels that lasted longer than five years. Short-term increases in debt do not have the severe deleterious effects on economic growth as sustained levels of high indebtedness. The World Wars fail to meet the sustained debt overhang criterion. Prior to the World Wars, the U.S. economy was very lightly indebted. During the military engagement debt levels surged dramatically, but as soon as they ended, the debt levels came down and precipitously so (Chart 1). In contrast, when the Pandemic hit in 2020, the U.S. economy was already suffering a massive debt overhang, with debt levels surging even more dramatically during the Pandemic and importantly, with the Pandemic’s effect on the economy winding down, the debt levels are continuing to advance even higher because of U.S. fiscal policy.

Excluding the 1914-20 and the 1939-53 periods from the post 1870 sample still leaves a robust sample of 130 readings (Chart 2). During this lengthy span, cyclical and secular economic conditions resulted in a negative yearly average for real Treasury bond yields twelve times, or just 8% of the time. In the eleven cases prior to 2021, nine of the negative real yield periods coincided with recessions – 1902-03, 1907, 1910, 1912, 1937, 1974-75, and 1980. Real long maturity yields were negative in 1934, which while not a recession year, happened during the horrific conditions of the Great Depression (1929-1939). In only one case, 1979, does the negative real yield happen during an economic expansion when the economy is not in a highly depressed state. Filtered by the five year sustained level of indebtedness criteria, the 2021 negative real yield was a singular event (Table 1).