A Seven-Decade Chart of Interest Rate Spikes and Crises: Here We Go Again

Welcome to Chart of the Day. I’m Robert Folsom.

“A Seven-Decade Chart of Interest Rate Spikes and Crises: Here We Go Again”

Here is the 3-month U.S. Treasury Bill yield from 1956 through the present — in other words, most of the past seven decades. Treasury debt is a $24 billion market that includes various bonds and notes and bills; the 3-month T-bill yield is among the most closely watched of these instruments and we’re also showing it via this graph, because it may prove to be the most visually informative financial chart you’ll see in 2023.

Yes, that’s a big claim. Please stay with me.

The trendline amounts to an easy-to-understand record of the Binge-Purge Cycle which has ravished various corporations, markets and entire economic sectors many times across this period.

Here’s what I mean: Let’s scroll way back to late in the second term of the Eisenhower presidency, when yields on the 3-month T-bill had fallen to below 1%, as in, an “easy credit” environment. So, corporations binged on low rates and were soon reporting high profits, including American steel firms. In turn, steel workers demanded higher wages. What followed was a nationwide steel labor strike that cut output by 90%. This marked a turning point which began a long-term decline in the entire American steel sector.

Similar episodes of this two-step cycle followed in the 1960s and ’70s. The easy credit of the early ’60s led to a binge that moved into the mid-1960s, when yields and rates were not so easy, specifically, February 1966, when the Dow Industrials began a 10-month, 26% decline. The long-term trend in the Dow did not go above and stay above its 1966 price peak until late 1982, nearly 17 years after.

Easy credit in 1967 restarted the cycle. The Penn Central bankruptcy followed in June 1970. Easy credit in the early ’70s led to the October 1974 Franklin National bankruptcy, at the time, the largest bank failure in U.S. history.

Yields declined to the level of easy credit only to stair-step higher into early 1980, when gold and silver spiked to all-time highs they would not see again for nearly two decades. Yields plunged to an easier credit level, then moved almost vertically up to the May 1981 all-time high at 16%. The damage done by the yield cycle this time included crises in the Farm Belt and LDC Debt.

So again, the cycle from “Easy Money to Panicked Illiquidity” had become recognizably clear.

From there, the long-term yield trend began to decline, yet the two-step cycle continued through the ’80s, ’90s and into the 2000s. Along the way, you can see the economic damage done in the various panics across those years. Here in 2003-2004, the easy credit low saw yields under 1%, a 45-year low.

As the upward turn in the cycle arrived, the May 2005 Financial Forecast showed a version of this chart and said this to subscribers:

“Once economic growth slows or interest rates rise enough to make servicing the accumulated debt impossible, restructuring or default results.”

And to be specific, this 2005 chart version also previewed the grim financial and economic headlines to come in real estate, derivatives, and the auto and airline industries.

Then, as forecast, the cycle did peak, and the Great Credit Crisis followed. The damage was not limited to a single market or sector. It was at scale unlike anything since the 1930s.

In turn, the cycle lows were historic, and yields remained below 1% for nearly a decade.

Then came a brief move up in yields, a fall, and the recent rise into the present. This chart is in the April 2023 issue of the Financial Forecast, and the complete version includes a detailed forecast, because the damage ahead will likely not be limited to a single market or sector.

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