6

https://www.quandl.com/data/MOODY/AAAYLD-Aaa-Corporate-Bond-Yield

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The lowest AAA corporate bond yield in U.S history happened in 1946 based on the quandl chart above. Amazingly, it was even lower than today's yield given the world of negative yield in government bonds that we are facing today.

What were the historical economic and financial conditions during that time that led to the very low interest rate for AAA corporate bonds?

11

One important fear after World War II was renewed deflation, because of the "wind down" of government spending after the war, and a fear of rising unemployment with the return of the soldiers to the U.S. economy. Such fears were a major depressant on interest rates.

The thing that the deflationists had overlooked was the 25% national savings rate during the war years, and the fact that the average American family had nearly a year's wages in the bank, or more likely in war bonds which competed with corporate bonds for available funds). The liquidation of these nest eggs, together with "pent up demand" resulting from war time deprivation, would have been inflationary--except for the excess capacity that had been developed during the war and could now be put to civilian use.

  • I remember reading somewhere that part of the "soft" repercusions of demobilization was helped through a program helping officers and soldiers to enrol into universities (so delaying and making more gradual their return to the workforce), but now I cannot find any reference to it. Does it ring a bell to you? – SJuan76 Jun 19 '16 at 19:59
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    @SJuan76: It was called the GI Billhttps://en.wikipedia.org/wiki/G.I._Bill that ensured that every veteran could afford college. That really contributed to increased productivity because these veterans were exceptionally mature students who had already received an "education" in the trenches. George Bush Sr. completed a four year program in two and a half years. – Tom Au Jun 19 '16 at 21:25
  • Didn't know it was still in effect. Thank you. – SJuan76 Jun 19 '16 at 21:33
  • That's not a good explanation because inflation did increase after the war even though aggregate demand fell. Furthermore it doesn't answer the question. – D J Sims Jun 21 '16 at 19:57
  • @DJ Sims: Both of those things happened, but to a lesser degree than anticipated. And bond yields (and other economic variables) react to "relative to expectations," not the actual levels. I also made the point that during the war, government bonds had been competing with corporate bonds for funds, driving down interest rates. Come the end of the war, "pent up demand" caused people to liquidate their government bonds, driving up interest rates across the board.This happened before they spent the money to lift aggregate demand, and hence interest rates. – Tom Au Jun 21 '16 at 21:25
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Oil.

http://www.investopedia.com/university/strength/strength4.asp

Bond yields are correlated with long run expectations of energy prices. A momentary spike in real energy price - such as occurred in the early 30s or late 2000s - will correspond with a small spike in yields, while a more lasting increase as in the 70s and early 80s will be more noticeable. Conversely, in the 40s when oil was replacing coal and prices were expected to stay low, bond yields were low as well.

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