Sovereign Bonds Are a Surprisingly Good Investment

Tyler Cowen points to a new paper from a trio of researchers who investigated the returns from sovereign bonds over the past two centuries. It turns out they’re a pretty good investment:

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 historical default and recovery rates.

A 7 percent average over 200 years is pretty good, but that got me curious. If this average was because of high 19th century returns, that would be ho-hum news. But if it’s because of high recent returns, that’s more interesting. And that’s what it turns out to be:

So there you have it. Past performance is no guarantee of future results etc., but it sure looks like a diversified portfolio of sovereign bonds is a pretty good investment these days. Even with the occasional default and haircut, the real return exceeds 8 percent over the past two decades.

It’s unclear why the premium over US bonds should be so big, but that’s just another mystery for the equity premium folks, I suppose.

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SIX TRUTHS

Reclaiming power from those who abuse it often starts with telling the truth. And in "This Is How Authoritarians Get Defeated," MoJo's Monika Bauerlein unpacks six truths to remember during the homestretch of an election where democracy, truth, and decency are on the line.

Truth #1: The chaos is the point.

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Please take a moment to see how all these truths add up, because what happens in the weeks and months ahead will reverberate for at least a generation and we better be prepared.

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