Interest rate should go up.
Several factors are moving the interest rates up during wars.
- Governments are borrowing more to fund the war; thus rates are higher
- Production is impacted thus inflation should be higher
- Currency can be weaker, as people are moving money to safer places, plus the fear of gov printing money. The higher interest rate is needed to compensate for the FX risk
Consol (Long-Term Bond) Yields in the United Kingdom moved up as the war progressed:
1913: 3.4275%
1914: 3.4823%
1915: 3.8580%
1916: 4.3165%
1917: 4.5823%
1918: 4.4287%
1919: 4.6372%
However, other factors also play an role. For example, as governments want to keep borrowing costs low, interest rates can be depressed.
During WWII, US effectively ran yield-curve control: the Fed supported Treasury prices to keep yields from rising too much. Fed “assisted the Treasury in this effort by implementing a form of yield curve targeting, capping interest rates at several points along the yield curve: from 3/8 percent on T-bills to 2½ percent on long-term bonds.”
