Do Demographics Correlate to Interest Rates?

The investment banking world is intricately involved in influencing the direction of interest rates. Of the many factors that “surprised” many in the investment banking business in 2014 was the continued downward pressure on interest rates.

Essentially, at the start of 2014 the presumption among most in the investment banking universe was that global growth would accelerate, with inflation going along for the ride. That didn’t happen. Instead, global growth weakened and the yield on interest bearing securities weakened as well. This is the conventional wisdom explanation.

Is the “Global Growth Was Weak” explanation right? The “global growth” explanation for declining yields in 2014 is not the only possible explanation. There’s a demographic explanation as well.


The demographic explanation is simply this.  The aging of the workforce is putting downward pressure on interest rates through a demand-side mechanism.  Essentially, with a larger portion of the workforce being made up of older Americans, there’s a greater demand for Treasuries and other interest bearing assets.

Here’s the evidence.

The left side of the graph is the younger population’s (16-34) share of the workforce.  The percentage of the workforce between 16 and 34 has been declining significantly since 1981, peaking in 1981 at an amazing 53 percent.

The figure “recently” bottomed in early 2011 at around 41 percent.


The Yield

What have interest rates done over the same period? The yield on the 10-year note peaked in September 1981 at around 15 percent. Since that 1981 peak, the 10-year yield has precipitously declined, reaching a bottom of about 1.5 percent in July 2012.

What’s Happened Since 2012?

The figure shows that perhaps there is a long-run correlation between the two, but does it explain the 2014 interest rate surprise? Well, here’s a zoom look at the relationship since 2012. Interestingly, the relationship may also have a short-term connection as well (although, there’s certainly a lag).


The figure shows that the share of the working age population 16 to 34 bottomed in mid-2011. The yield bottomed a year later in mid-2012. Fast forward to 2014. The share of the working age population 16 to 34 experienced a slight peak at a little more than 41.3 percent in mid-2014 and has since slightly declined. Likewise, in early 2014 the yield on the 10-year note peaked in early 2014 and has precipitously declined.

Perhaps causal, perhaps not.


Overall, the investment banking world may want to pay more attention to demographics when explaining interest rate movements, and less towards the conventional wisdom of “stronger or weaker than expected economic growth.”

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