Sovereign Bonds since Waterloo

This paper studies external sovereign bonds as an asset class. It compiles a new database of266,000 monthly prices of foreign-currency government bonds traded in London and New York between 1815 (the Battle ofWaterloo) and 2016, covering up to 91 countries. The main insight is that, as in equity markets, the returns onexternal sovereign bonds have been sufficiently high to compensate for risk. Real ex-post returns average more than6 percent annually across two centuries, including default episodes, major wars, and global crises. This represents anexcess return of 3–4 percent above US or UK government bonds, which is comparable to stocks and outperformscorporate bonds. Central to this finding are the high average coupons offered on external sovereign bonds. Theobserved returns are hard to reconcile with canonical theoretical models and the degree of credit risk in thismarket, as measured by historical default and recovery rates. Based on an archive of more than 300 sovereign debtrestructurings since 1815, the authors show that full repudiation is rare; the median creditor loss (haircut) isbelow 50 percent.