I assumed, like any resonable person, that you would present data if you had. But instead, you did what you always do, you assume the other person has some kind of major bias and you are the only one that's resonable. then you run away from debate like you are doing right now. that has happened many times in the past. instead of talking about magic data, present it, I have no problems looking at (as you seem to think), don't talk about it, leave it at that and run away
Is the long-term return in government bonds, negative or close to 0%?
- Thread starter Daal
- Start date
It's not magic, as I have said a number of times. I take your analysis seriously and decided to examine whether it holds up, since your conclusion would be curious, if true. So, for myself, I looked at the recent cases of distress (Iceland, Greece, Venezuela, just to name a few) to examine your hypothesis. I have found that I don't agree with you. I am happy with that.
These are recent crises. a huge real loss is a lot more difficult to recover from in bonds than in stocks (therefore, it should not have happened in the first place, not in the bond market). check back in 10 years and you will see who did better in those countries. in stocks you get compensated for the huge drawdown risk, in bonds, its a virtual permament capital loss when it happens (because people don't live for centuries). You need time to be able to tell how much of the loss was a permanent loss and how much was dictated by short-term factors (like people pancking, selling stocks for liquidity in bad economic times) etc.
But even if you disagree that one has to look at it long-term, why this has to do with anything? I'm asking a simple question, is the long-term return in government bonds (average or median) negative? That's the question.
I presented my 1900-2000 data, it shows that 1/3 of the sample (with 100 year of returns) is negative. The average return is only 0.71%. The sample does not contain a lot of bad offenders in terms of inflation/default, yet it contains almost every 'good' country from Reinhardt and Rogoff's work. Adding other countries in there, almost certaintly will bring returns to negative. Anyone has real hard evidence that I'm wrong? (without using data that is limited to a few decades)? How come that doesn't get talked about? Its a pretty big deal if you have an asset class that gets pushed to people all over the world, yet it has negative returns. And I suspect that if you put all the countries in there, the negative return won't be small at all, it will be quite significant.
Yet in my country (Brazil), the No1 asset that gets pushed to people on a daily basis by personal finance gurus is fixed income. Maybe that's a good idea, maybe it isn't but I bet these personal financers don't know that the asset class is a russian roulette with negative avg and median returns
Last edited:
Well, here is a rudimentary test:
This is from the book Triumph of the Optimists 1900-2000
The average return is 0.71%. So it appears that bonds have a positive return right? Except this is all the data that is avaliable (at least to those researchers). There are a huge amount of countries where there is no data. But the sucessful countries (like Switzerland, the US, Canada) there is plenty of data. In fact, I dont think there is a stable bond market (as measured in a 100 year period) that is not in that sample, and if there is, its a small number (maybe one or two).
But there are a LOT of failed bond markets that are not there. Where is Uganda? Where is Argentina? Greece? The more I look at data, the more I find that success in bond markets is very rare, its the exception not the rule. So, if I had 100 year data of all countries, its very unlikely the return would be positive. Most of the countries not in there (unstable countries), had several currencies, several inflation crises, several debt default crises. Effectively, they repeated the experience of Italy/Germany/Japan/France (which have negative returns), they had one or several huge drawdowns that bond markets need many decades/centuries to recover from.
So, it looks to me that its quite unlikely that if had 100y global data, the return would be positive. Its not like sucessful bond markets can remains hidden for long. Sucessful countries become known and turn into 'havens' for capital (even if the country is small), its failure that gets hidden/dissapears
how to read this graph and how did the authors got to those numbers though ? Did they weigh heavily treasury bills or do they mean above inflation ? if the US government hasn t defaulted in the 20th century, even 10years bonds should have paid more than 1.60% over that period to an investor
I have no idea why you would say such a thing? Have you actually looked at what happened in these specific cases? I will give you a particular example of Iceland, since you asked so nicely.
Rough drawdown during 2008 crisis:
10y govt bond (Rikisbref) 12%
OMX Iceland All-Share Index 94%
Rough cumulative performance since the 2009 crisis low:
10y local ccy govt bond (Rikisbref) 151%
OMX Iceland All-Share Index 233%
Now you tell me pls, which return profile do you prefer? Obviously, these are in local ccy nominal terms. Inflation that followed the crisis (driven by ISK devaluation/capital controls and all those joyful things) undoubtedly would have been unpleasant for bond investors, but it would have undoubtedly affected equity returns as well.
If you want an even better example, look at Japan since the bubble (almost 30 years now). JGB 7-10yr index cumulative nominal total return 1990 to present is arnd 170%, in a virtually straight line. During the same period, Nikkei experienced a, what, 80% peak to trough drawdown and the cumulative total return for the same period is roughly -30%.
Like I mentioned previously, I am not necessarily disagreeing with your statement about long-term govt bond returns. I was disagreeing with the other statements that you have made. I thought I made it quite clear.
Last edited:
The problem with that example is that inflation didn't even cross the 20% level (Rogoff level for an inflation crisis) and goverment bonds didn't default. You just proved that bank heavy equity indexes are a bad place to be during a banking crisis
Right, so does that mean you are seeking to qualify your original broad statement?
And I didn't prove anything, but then I wasn't trying to. I was simply trying to respond to some particular statements you have made.
What I was saying is so obvious it shouldn't be controversial at all. It was a different way to say that stocks (and real estate) are a better inflation hedges. According to Rogoff, most of the time governments prefer inflation when dealing with excess domestic debt, except sometimes they prefer default. When they prefer inflation, stocks are in a better position than bonds (obviously). And the more unexpected inflation, the better off they will be (and this is the preferred way governments deal with the problem).
When they default, its harder to tell but usually, stocks will be in a better position as well, except if the market is very heavy on banks/insurance. But usually, there will be a fair amount of inflation (currency collapse), which will hurt bonds (but not hurt stocks if given enough time for companies to adjust prices, etc also exports go up ). So its pretty obvious that overall, under these tail risk scenarios, stocks are an overall better relative bet. Especially if you give time to the data. There are some exceptions but they are rare, Greece has been one (due to the EUR, no high inflation has surfaced) but that is not the case most of the time. I suppose 'soft default' cases (small haircuts) could be worse for stocks as bond holders losses are limited but stocks could get hurt hugely if there are a lot of banks/insurance in the index but that will pale in comparrision (in number) to the other cases
Iceland as I said has nothing to do with all of this, there was no gov debt default and barely any inflation (under 20%). I havent studied Venezuela but i'd be shocked if stocks weren't a better overall bet as compared to gov bonds. Especially if you start the data before the inflation surprise. Bonds get clobbered and don't make up for it, but stocks do. Stocks in most cases are more resilient than bonds as inflation (and default) is a much bigger problem than deflation, that's not even debatable!
Right, so there is a whole lot going on here... I will most definitely respond tomorrow.