Kiel Institute for the World Economy
Research Area on International Finance
Institutional Affiliation: Kiel Institute for the World Economy
NBER Working Papers and Publications
|February 2019||Sovereign Bonds since Waterloo|
with Carmen M. Reinhart, Christoph Trebesch: w25543
This paper studies external sovereign bonds as an asset class. We compile a new database of 220,000 monthly prices of foreign-currency government bonds traded in London and New York between 1815 (the Battle of Waterloo) and 2016, covering 91 countries. Our 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 averaged 7% annually across two centuries, including default episodes, major wars, and global crises. This represents an excess return of around 4% above US or UK government bonds, which is comparable to stocks and outperforms corporate bonds. The observed returns are hard to reconcile with canonical theoretical models and with the degree of credit risk in this market, as measured by...