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Sovereign Bonds since Waterloo

Discussion Papers 1993, 49 S. + Anh.

Josefin Meyer, Carmen M. Reinhart, Christoph Trebesch


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Published in: The Quarterly Journal of Economic 137 (2022), 3


This paper studies external sovereign bonds as an asset class. It compiles a new database of 266,000 monthly prices of foreign-currency government bonds traded in London and New York between 1815 (the Battle of Waterloo) and 2016, covering up to 91 countries. The main insight is that, as in equity markets, the returns on external sovereign bonds have been sufficiently high to compensate for risk. Real ex-post returns average more than 6 percent annually across two centuries, including default episodes, major wars, and global crises. This represents an excess return of 3-4 percent above US or UK government bonds, which is comparable to stocks and outperforms corporate bonds. Central to this finding are the high average coupons offered on external sovereign bonds. The observed returns are hard to reconcile with canonical theoretical models and the degree of credit risk in this market, as measured by historical default and recovery rates. Based on an archive of more than 300 sovereign debt restructurings since 1815, the authors show that full repudiation is rare; the median creditor loss (haircut) is below 50 percent.

Josefin Meyer

Head of International Macroeconomics Research Group in the Macroeconomics Department

JEL-Classification: E4;F3;F4;G1;N0
Keywords: Sovereign debt, return on investment, sovereign risk