Sovereign Bond Returns Have Always Been Terrible
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Sovereign Bond Returns

Even though government bond yields have risen from their lows last year, the universe’s average yield is still low enough to put many investors off buying these securities. And some sovereign bonds, particularly those of Germany, are still trading in negative territory.

Sovereign bonds have always had the reputation of being secure investments, but they’d never been able to claim to be good investments. Indeed, even after a three-decade long bull market, sovereign bonds have lagged equities in real terms by at least 200 basis points per since 1900.

This data comes from Credit Suisse’s annual Global Investment returns yearbook. Published every year around December, the yearbook looks at the real returns of equities, bills and bonds since the turn of the last century across more than 20 major markets.

Despite all the political and economic turmoil, as well as two massive global conflicts that have taken place during the past 117 years, Credit Suisse’s data reports that the real return of equities in almost every location studied during this period was between 3% to 6% per annum. Equities were always the best performing asset class everywhere.

Sovereign Bond Returns Have Always Been Terrible

Government bonds, on the other hand, did almost nothing to help investors during this period. Across the 21 countries, the average annualized real return of sovereign bonds between 1900 and 2016 was just 1%. Excluding Austria’s very low average annual real return of less than 0%, the overall global return jumps to 1.3%.

The best-performing country in terms of pure government bonds was Sweden, with an annualized real return of 2.7%. These finding Credit Suisse notes, “suggest that, over the full 117-year period, real bond returns in many countries were below investors’ prior expectations, with the largest differences occurring in the highest-inflation countries.”


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Sovereign Bond Returns Have Always Been Terrible
Sovereign Bond Returns Have Always Been Terrible

Credit Suisse’s report notes that the return of 1.3% over the 117 year study period was 1.3% better than the return investors would have received if they had remained in cash (measured by returns on Treasury bills American and British investors earned annualized real returns of 0.8% and 1.0%, respectively by owning bills between 1900 and 2017. However, bonds are much more volatile than cash. For the period studied, the average standard deviation of real bond returns was 13.0% versus 23.5% for equities and 7.7% for bills (once again excluding Austria). US real equity returns had a standard deviation of 20.0% versus 10.4% for bonds and 4.6% for bills. Credit Suisse sums up:

 

Canyon Capital: The Debt Markets Are Sending A Warning

“Clearly stocks are the riskiest asset class, and we saw above that they have beaten bonds in every country. Similarly, bonds, which are less risky than equities, but riskier than bills, have beaten bills in every country. Our long-run findings thus provide strong support for one of the lasting laws of finance – the law of risk and return, and the notion that risk-bearing should carry an expected reward.”

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