Huge financing is required for wars. World War II was the largest-scale war in human history. Therefore, the large borrowing should have led to a rise in bond yields. Amazingly, bond yields dropped during World War II! See the chart below.

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This is most puzzling. What were the conditions and events then that led to the anomaly?

Another interesting development was that one of the greatest bear bond market followed after the end of World War II. The bear market ended with 15% yield, killed by Paul Volcker in the early 1980s.

2 Answers 2


Bond yields dropped as it became more and more apparent that the United States would win the war. Then the war expenditures were seen an "investment" in a lasting and durable peace. At the end of World War II, the U.S. had 50% of the world's industrial capacity, up from 40% before the war (according to Paul Kennedy in "The Rise and Fall of the Great Powers).

The great fear was NOT that the borrowings were "too high" and could not be repaid. It was that the Axis would win and not honor the U.S. issued bonds.

Or, more likely, they might "draw" and start a Cold War that would keep bond yields high. Bond yields did, in fact rise through the 1950s (and later), as a result of the Cold War against the Soviet Union. That was a factor in the multi-decade bear market in bonds that lasted until the early 1980s.

One reason for the spike in interest rates in 1980 was the Iranian hostage crisis. Basically, an attack on the 52 American diplomats was an attack on U.S. world power and leadership, leading to a rise in yields.

Geopolitical factors sometimes "trump" economic ones.

  • Great answer. Missed out the geopolitical considerations.
    – curious
    Commented Nov 1, 2015 at 1:27
  • Is yield only part of the story but also a wish to own instruments denominated in dollars? If you were worried about your own currency inflating or becoming literally worthless, your least concern would be yield -- you would be thrilled to be able to hold something that would eventually (if you were say a German) be redeemable in something other than marks.
    – Jeff
    Commented Sep 13, 2017 at 17:36
  • @Jeff: The "safety" of a U.S. Treasury would represent "yield' to you in your home country currency/ Basically as a form of "insurance."
    – Tom Au
    Commented Sep 13, 2017 at 17:40
  • @TomAu: That is what I was trying to say -- am I missing something? I think a German who could somehow get his hands on a bond in very large denominations (I don't know in practice how this would have happened) would not have minded even a negative nominal yield if it meant they could safely move a large fortune in a convenient and safe form.
    – Jeff
    Commented Sep 13, 2017 at 17:53

The return on a bond can, to a first approximation, be thought of as the inverse of it's price. When bond yields drop this means their price rose - due to either decreased supply or increased demand. In the Forties the U.S. economy started to recover from the Great Depression; people got jobs again, and the demand for some place to keep the earned savings safe grew; so bond demand rose; and the price went up reflected in decreased rates.

In the cold war inflation started, first slowly and then more rapidly through the early 1980's (when mortgage rate in North America topped out at 20% per annum). This increase in inflation must be compensated by a lower price for a long-term investment such as bonds, reflected in continual increase in rates.

Then as inflation rates started dropping again the demand for bonds again rose, increasing demand and increasing prices, reflected in dropping rates.

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