"The possibility of maintaining the annuity business depends chiefly upon future interest earnings. Until this time most of the companies have apparently been able to earn a higher rate of interest," wrote researchers Dickinson & Elliott in 1944. They were also concerned about the direction of future interest rates, as well they should have been. Investment grade bond yields dropped to 2.8 percent in 1946 before modestly rising to the 3 percent to 3.5 percent range for most of the next 10 years.
From 1956 to 1966 bond yields were 4 percent to 5 percent and didn't really start rising until the inflationary period associated with the Vietnam War that eventually pushed bond yields into the high teens by the early '80s.
Since bond yields peaked 30 years ago, they have been on a downward slope. For the last three months my composite bond model has been showing 4.8 percent yields. This is lower than it has been during the work life of almost anyone in the industry, but as mentioned above it is by no means unprecedented.
Hope for the future
With the U.S. Treasury announcing plans to buy government bonds, it would seem that bond yields will be heading still lower in 2011. And beyond? In business cycles over the last 50 years, interest rates have moved up during periods of recovery. If this cycle resembles any of the recoveries since President Kennedy, bond yields will go up. However, rates don't always go up when the economy expands. During the expansion years following World War II and in the Roaring '20s, bond yields were flat to declining. The composite bond rate was 7.5 percent in 1920 and 4.9 percent in 1928.
