Safe Until Crisis: What 300 Years of Wars Reveal About Government Debt Safety

Key Takeaways

• Wars cause real bond losses historically
• Pandemic emergencies also erode bond returns
• US and UK data span three centuries
• Safe‑asset label overstated during crises
• Policymakers should reassess sovereign debt risk

Summary

A new VoxEU column by Jiang, Lustig, Van Nieuwerburgh and Xiaolan examines three centuries of U.S. and U.K. war and pandemic episodes. Their analysis shows that sovereign bonds, traditionally viewed as safe havens, have repeatedly suffered large real‑term losses during these crises. The authors argue that the safety premium of government debt evaporates when fiscal pressures spike. The study challenges the conventional belief that sovereign bonds are universally risk‑free assets.

Pulse Analysis

Government bonds have long been the cornerstone of low‑risk portfolios, prized for their perceived immunity to market turbulence. Yet the new VoxEU column reveals a starkly different picture when sovereigns confront extraordinary fiscal strains. By compiling data from wars ranging from the 18th‑century Anglo‑French conflicts to the World Wars, and pandemics such as the 1918 flu, the authors demonstrate a consistent pattern: real returns on bonds plunge, erasing the safety premium investors expect. This historical lens underscores that the bond market’s resilience is conditional, not absolute.

The authors quantify the impact, showing that during major wars, real yields on U.S. and U.K. government bonds fell by several percentage points, often turning negative after adjusting for inflation. Pandemic shocks, while shorter, produced similarly pronounced drops, as governments rushed to finance emergency health spending. These losses were not isolated incidents but part of a recurring cycle where fiscal deficits surge, debt issuance spikes, and investor confidence wanes. The research highlights that the magnitude of loss varies with war duration, financing methods, and pre‑existing debt levels, but the direction remains consistently adverse for bondholders.

For today’s investors, the implication is clear: sovereign debt cannot be treated as a default‑safe asset in every scenario. Portfolio managers must incorporate geopolitical and health‑risk scenarios into duration and credit assessments, possibly diversifying into assets less correlated with fiscal shocks. Policymakers, too, should recognize that excessive reliance on bond markets to fund wartime or pandemic spending can undermine market confidence, raising borrowing costs when they are most needed. The study invites a broader dialogue on building more resilient sovereign financing frameworks that balance immediate crisis funding with long‑term debt sustainability.