Markets in a Minute
Visualizing the 200-Year History of U.S. Interest Rates
This Markets in a Minute Chart is available as a poster.
This Markets in a Minute Chart is available as a poster.
Visualizing the 200 Year History of U.S. Interest Rates
U.S. interest rates will stay near zero for at least three years as the Federal Reserve enacts measures to prop up the economy.
But are low interest rates a new phenomenon? Interestingly, one study by the Bank of England shows that this pattern of declining interest rates has taken place globally since the late Middle Ages. In fact, it suggests that these downward-sloping rate trends have taken place even before modern central banks entered the scene—illustrating an entrenched, historical trend.
This Markets in a Minute chart from New York Life Investments tracks the history of U.S. interest rates over two centuries, from the creation of the first U.S. Bank to the current historic lows.
U.S. Interest Rates: Historic Highs and Lows
What are the highest and lowest rates throughout history?
Prior to today’s historically low levels, interest rates fell to 1.7% during World War II as the U.S. government injected billions into the economy to help finance the war. Around the same time, government debt ballooned to over 100% of GDP.
Fast-forward to 1981, when interest rates hit all-time highs of 15.8%. Rampant inflation was the key economic issue in the 1970s and early 1980s, and Federal Reserve Chairman Paul Volcker instigated rate controls to restrain demand. It was a period of low economic growth and rising unemployment, with jobless figures as high as 8%.
| Year | Average Interest Rate* | Year Open | Year Close | Annual % Change |
|---|---|---|---|---|
| 2020 | 0.9% | 1.9% | 0.7%** | -65.1% |
| 2019 | 2.1% | 2.7% | 1.9% | -28.6% |
| 2018 | 2.9% | 2.5% | 2.7% | 11.8% |
| 2017 | 2.3% | 2.4% | 2.4% | -1.6% |
| 2016 | 1.8% | 2.2% | 2.4% | 7.7% |
| 2015 | 2.1% | 2.1% | 2.3% | 4.6% |
| 2014 | 2.5% | 3.0% | 2.2% | -28.6% |
| 2013 | 2.4% | 1.9% | 3.0% | 70.8% |
| 2012 | 1.8% | 2.0% | 1.8% | -5.8% |
| 2011 | 2.8% | 3.4% | 1.9% | -42.7% |
| 2010 | 3.2% | 3.9% | 3.3% | -14.3% |
| 2009 | 3.3% | 2.5% | 3.9% | 71.1% |
| 2008 | 3.7% | 3.9% | 2.3% | -44.3% |
| 2007 | 4.6% | 4.7% | 4.0% | -14.2% |
| 2006 | 4.8% | 4.4% | 4.7% | 7.3% |
| 2005 | 4.3% | 4.2% | 4.4% | 3.5% |
| 2004 | 4.3% | 4.4% | 4.2% | -0.7% |
| 2003 | 4.0% | 4.1% | 4.3% | 11.5% |
| 2002 | 4.6% | 5.2% | 3.8% | -24.5% |
| 2001 | 5.0% | 4.9% | 5.1% | -1.0% |
| 2000 | 6.0% | 6.6% | 5.1% | -20.6% |
| 1999 | 5.7% | 4.7% | 6.5% | 38.7% |
| 1998 | 5.3% | 5.7% | 4.7% | -19.1% |
| 1997 | 6.4% | 6.5% | 5.8% | -10.6% |
| 1996 | 6.4% | 5.6% | 6.4% | 15.2% |
| 1995 | 6.6% | 7.9% | 5.6% | -28.8% |
| 1994 | 7.1% | 5.9% | 7.8% | 34.5% |
| 1993 | 5.9% | 6.6% | 5.8% | -13.0% |
| 1992 | 7.0% | 6.8% | 6.7% | -0.2% |
| 1991 | 7.9% | 8.0% | 6.7% | -17.0% |
| 1990 | 8.6% | 7.9% | 8.1% | 1.9% |
| 1989 | 8.5% | 9.2% | 7.9% | -13.2% |
| 1988 | 8.9% | 8.8% | 9.1% | 3.5% |
| 1987 | 8.4% | 7.2% | 8.8% | 22.1% |
| 1986 | 7.7% | 9.0% | 7.2% | -19.7% |
| 1985 | 10.6% | 11.7% | 9.0% | -22.1% |
| 1984 | 12.5% | 11.9% | 11.6% | -2.3% |
| 1983 | 11.1% | 10.3% | 11.8% | 14.1% |
| 1982 | 13.0% | 14.2% | 10.4% | -25.9% |
| 1981 | 13.9% | 12.4% | 14.0% | 12.5% |
| 1980 | 11.4% | 10.5% | 12.4% | 20.3% |
| 1979 | 9.4% | 9.2% | 10.3% | 12.9% |
| 1978 | 8.4% | 7.8% | 9.2% | 17.6% |
| 1977 | 7.4% | 6.8% | 7.8% | 14.2% |
| 1976 | 7.6% | 7.8% | 6.8% | -12.2% |
| 1975 | 8.0% | 7.4% | 7.8% | 4.9% |
| 1974 | 7.6% | 6.9% | 7.4% | 7.3% |
| 1973 | 6.9% | 6.4% | 6.9% | 7.6% |
| 1972 | 6.2% | 5.9% | 6.4% | 8.8% |
| 1971 | 6.2% | 6.5% | 5.9% | -9.4% |
| 1970 | 7.4% | 7.9% | 6.5% | -17.5% |
| 1969 | 6.7% | 6.0% | 7.9% | 27.9% |
| 1968 | 5.6% | 5.6% | 6.2% | 8.1% |
| 1967 | 5.1% | 4.7% | 5.7% | 22.8% |
| 1966 | 4.9% | 4.6% | 4.6% | -0.2% |
| 1965 | 4.3% | 4.2% | 4.7% | 10.5% |
| 1964 | 4.2% | 4.1% | 4.2% | 1.7% |
| 1963 | 4.0% | 3.8% | 4.1% | 7.5% |
*Indicated by 10-Year Treasury Yields, a prime mover of interest rates
**As of September 28, 2020
Source: Macrotrends
Over the last year, interest rates have dropped from 2.1% to 0.9%, a 65% decrease. Rates are now below 1945 levels—and well under 6.1%, the average U.S. interest rate over the last 58 years.
Longer Horizons
Interest rates in the 18th and 19th centuries also provide illuminating trends.
After falling for three decades at the turn of the century, interest rates stood at 4% in 1835. That year, president Andrew Jackson paid off the U.S. national debt for the first and only time in history, as debt was seen as a “moral failing” or “black magic” in his eyes.
One consequence of this was the government sold swaths of land to finance the federal budget, ultimately avoiding the accumulation of debt. It didn’t last for long. The influx of land sales led to a real estate bubble and eventually, the economy fell into a recession. The government had to borrow again and rates ticked higher over the next several years.
Similarly, after the Civil War ended in 1865, data shows that interest rates also witnessed a long-term, negative slope, which ended in 1945. It then took 100 years for interest rates to exceed the highs of the Civil War era.
Why So Low For So Long?
While the exact reasons are unclear, broad structural forces may be influencing interest rates.
One explanation suggests that higher capital accumulation could be a factor. Another suggests that modern welfare states, with their increased public spending, have as well. For instance, average expenditures of total GDP in the UK averaged 35% between 1981 and 1960, compared to 8% between 1700 and 1750.
Along with this, rates usually have cycles that last between 22 and 27 years. When cycles shift from rising to falling rates, a quick reversal typically takes place. This was seen in 1982, when interest rates dropped 25%—from 14.2% to 10.4%—in one year. However, a different trend can be seen when falling rates switch to rising trends. These reversals typically average 2-14 years.
As near-zero rates seem more likely for the extended future, market distortions—such as ultra-low income yields—may become more commonplace. In turn, investors may want to rethink traditional asset allocations between fixed income, equities, and alternatives.
Markets in a Minute
What is the Success Rate of Actively Managed Funds?
For actively managed funds, the odds of beating the market over the long run are like finding a needle in a haystack.
What is the Success Rate of Actively Managed Funds?
Over a 20-year period, 95% of large-cap actively managed funds have underperformed their benchmark.
The above graphic shows the performance of actively managed funds across a range of fund types, using data from S&P Global via Charlie Bilello.
Missing the Mark: Actively Managed Funds
Several factors present headwinds to actively managed funds.
- Trading costs: First, fund managers will trade more often than passive funds. These in turn incur costs, impacting returns.
- Cash holdings: Additionally, many of these funds hold a cash allocation of about 5% or more to capture market opportunities. Unlike active funds, their passive counterparts are often fully invested. Cash holdings can have the opposite effect than intended—dragging on overall returns.
- Fees: Active funds can charge up to 1-2% in investment manager fees while funds that tracked an index passively charged just 0.12% on average in 2022. These additional costs add up over time.
Below, we show how active funds increasingly underperform against their benchmark over each time period.
| Fund Type | 1 Year % Underperformed | 5 Year % Underperformed | 10 Year % Underperformed | 20 Year % Underperformed |
|---|---|---|---|---|
| All Large-Cap | 51 | 87 | 91 | 95 |
| All Small-Cap | 57 | 71 | 89 | 94 |
| Large-Cap Growth | 74 | 86 | 96 | 98 |
| Large-Cap Value | 59 | 69 | 85 | 87 |
| Small-Cap Growth | 80 | 59 | 85 | 97 |
| Small-Cap Value | 41 | 81 | 91 | 92 |
| Real Estate | 88 | 62 | 74 | 87 |
As we can see, 51% of all large-cap active mutual funds underperformed in a one-year period. That compares to 41% of small-cap value funds, which had the best chance of outperforming the benchmark annually. Also, an eye-opening 88% of real estate funds underperformed.
For context, Warren Buffett’s firm Berkshire Hathaway has beat the S&P 500 two-thirds of the time. Even the world’s top stock pickers have a hard time beating the market’s returns.
2020 Market Crash: A Case Study
How about active funds’ performance during a crisis?
While the case for actively managed funds is often stronger during a market downturn, a 2020 study shows how they continued to underperform the index.
Overall, 74% of over 3,600 active funds with $4.9 trillion in assets did worse than the S&P 500 during the 2020 market plunge.
| Stage of 2020 Cycle | Time Period | % Underperforming S&P 500 |
|---|---|---|
| Crisis | Feb 20 - Apr 30, 2020 | 74.2 |
| Crash | Feb 20 - Mar 23, 2020 | 63.5 |
| Recovery | Mar 24 - Apr 30, 2020 | 55.8 |
| Pre-Crisis | Oct 1 2019 - Jan 31, 2020 | 67.1 |
Source: NBER
In better news, roughly half underperformed through the recovery, the best out of any market condition that was studied.
The Bigger Impact
Of course, some actively managed funds outperform.
Still, choosing the top funds year after year can be challenging. Also note that active fund managers typically only run a portfolio for four and a half years on average before someone new takes over, making it difficult to stick with a star manager for very long.
As lower returns accumulate over time, the impact of investing in active mutual funds can be striking. If an investor had a $100,000 portfolio and paid 2% in costs every year for 25 years, they would lose about $170,000 to fees if it earned 6% annually.
Markets in a Minute
Ranked: The Largest Bond Markets in the World
The global bond market stands at $133 trillion in value. Here are the major players in bond markets worldwide.
The Largest Bond Markets in the World
In 2022, the global bond market totaled $133 trillion.
As one of the world’s largest capital markets, debt securities have grown sevenfold over the last 40 years. Fueling this growth are government and corporate debt sales across major economies and emerging markets. Over the last three years, China’s bond market has grown 13% annually.
Based on estimates from the Bank for International Statements, this graphic shows the largest bond markets in the world.
Ranked: The World’s Top Bond Markets
Valued at over $51 trillion, the U.S. has the largest bond market globally.
Government bonds made up the majority of its debt market, with over $26 trillion in securities outstanding. In 2022, the Federal government paid $534 billion in interest on this debt.
China is second, at 16% of the global total. Local commercial banks hold the greatest share of its outstanding bonds, while foreign ownership remains fairly low. Foreign interest in China’s bonds slowed in 2022 amid geopolitical tensions in Ukraine and lower yields.
| Bond Market Rank | Country / Region | Total Debt Outstanding | Share of Total Bond Market |
|---|---|---|---|
| 1 | 🇺🇸 U.S. | $51.3T | 39% |
| 2 | 🇨🇳 China | $20.9T | 16% |
| 3 | 🇯🇵 Japan | $11.0T | 8% |
| 4 | 🇫🇷 France | $4.4T | 3% |
| 5 | 🇬🇧 United Kingdom | $4.3T | 3% |
| 6 | 🇨🇦 Canada | $4.0T | 3% |
| 7 | 🇩🇪 Germany | $3.7T | 3% |
| 8 | 🇮🇹 Italy | $2.9T | 2% |
| 9 | 🇰🇾 Cayman Islands* | $2.7T | 2% |
| 10 | 🇧🇷 Brazil* | $2.4T | 2% |
| 11 | 🇰🇷 South Korea* | $2.2T | 2% |
| 12 | 🇦🇺 Australia | $2.2T | 2% |
| 13 | 🇳🇱 Netherlands | $1.9T | 1% |
| 14 | 🇪🇸 Spain | $1.9T | 1% |
| 15 | 🇮🇳 India* | $1.3T | 1% |
| 16 | 🇮🇪 Ireland | $1.0T | 1% |
| 17 | 🇲🇽 Mexico* | $1.0T | 1% |
| 18 | 🇱🇺 Luxembourg | $0.9T | 1% |
| 19 | 🇧🇪 Belgium | $0.7T | >1% |
| 20 | 🇷🇺 Russia* | $0.7T | >1% |
*Represent countries where total debt securities were not reported by national authorities. These figures are the sum of domestic debt securities reported by national authorities and/or international debt securities compiled by BIS.
Data as of Q3 2022.
As the above table shows, Japan has the third biggest debt market. Japan’s central bank owns a massive share of its government bonds. Central bank ownership hit a record 50% as it tweaked its yield curve control policy that was introduced in 2016. The policy was designed to help boost inflation and prevent interest rates from falling. As inflation began to rise in 2022 and bond investors began selling, it had to increase its yield to spur demand and liquidity. The adjustment sent shockwaves through financial markets.
In Europe, France is home to the largest bond market at $4.4 trillion in total debt, surpassing the United Kingdom by roughly $150 billion.
Banks: A Major Buyer in Bond Markets
Like central banks around the world, commercial banks are key players in bond markets.
In fact, commercial banks are among the top three buyers of U.S. government debt. This is because commercial banks will reinvest client deposits into interest-bearing securities. These often include U.S. Treasuries, which are highly liquid and one of the safest assets globally.
As we can see in the chart below, the banking sector often surpasses an economy’s total GDP.
As interest rates have risen sharply since 2022, the price of bonds has been pushed down, given their inverse relationship. This has raised questions about what type of bonds banks hold.
In the U.S., commercial banks hold $4.2 trillion in Treasury bonds and other government securities. For large U.S. banks, these holdings account for almost 24% of assets on average. They make up an average 15% of assets for small banks in 2023. Since mid-2022, small banks have reduced their bond holdings due to interest rate increases.
As higher rates reverberate across the banking system and wider economy, it may expose further strains on global bond markets which have expanded rapidly in an era of dovish monetary policy and ultra-low interest rates.
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