The US Bond Market before 1926: Investor Total Return from 1793, Comparing Federal, Municipal and Corporate Bonds Part II: 1857 to 1926

Abstract

US securities markets took root after Alexander Hamilton’s refunding of the Federal debt in the early 1790s. Accordingly, a market in bonds has been in operation in the US for over two centuries. Until recently, however, little was known about bond market returns prior to 1857. This paper focuses on investor holding period returns, using newly compiled data on bond prices, rather than focusing on the movement of yields, as in Homer (1963) and Macaulay (1938). It incorporates the relatively familiar Treasury securities from the years before President Andrew Jackson paid off the debt in 1835, but also includes state and city debt, which ballooned beginning in the 1820s, as well as corporate debt, from its beginnings about 1830 to its explosion after 1850. I find that all three classes of bonds provided investors with similar total returns prior to 1857, excepting a brief period in the 1840s when state securities plunged before recovering. I also find that over the entire 19th century, real bond returns considerably exceeded the long-term average return of 3.6% proposed for bonds in Siegel (2014). In explaining these high bond returns I identify problems with Siegel’s data sources, notably Homer’s mistaken interpretation of Macaulay’s data. I further find that in these early years, bonds sometimes out-performed stocks over periods of several decades, again contrary to Siegel’s thesis. The paper considers the implications of a demonstration that stocks and bonds performed differently in the nineteenth century as compared to the twentieth century.