War, Debt, and the Real-Return Puzzle
The latest across-century analysis by the Center for Economic Policy Research lays out a blunt reality: government bonds, long seen as the ultimate safe haven, have historically delivered negative real returns during major wars and pandemic-scale emergencies. The researchers, drawing on 300 years of data from the United States and the United Kingdom, say the pattern is persistent across eras and crisis types.
Lead author Zhengyang Jiang, with co-authors Hanno Lustig, Stijn Van Nieuwerburgh, and Mindy Xiaolan, emphasizes that this is not a one-off quirk. The study shows bonds tend to lose ground in real terms when government spending explodes and inflation accelerates in response to shocks. That finding challenges the conventional wisdom that Treasuries and related government debt are rock-solid ballast for portfolios during turmoil.
The authors write that the historical signal is clear: "years wars show they are disaster times for bondholders." While the exact dynamics vary by war and crisis, the underlying forces—surging spending, inflation pressures, and volatile fiscal responses—consistently squeeze real returns on debt.
What Actually Drives the Downturn in Bond Yields During Crises
The CEPR team attributes the weakness in government bonds to a simple, forceful chain of events. When conflict or emergency erupts, governments typically crank up spending, often funded through debt instead of immediate tax hikes. This combination pushes debt issuance higher and raises the market’s inflation expectations, eroding the purchasing power of fixed payments over time. In short, the real value of promised interest and principal can erode faster than the nominal yields compensate investors.
Across the dataset, the authors quantify the impact. In the first four years of major conflicts, bondholders faced average real losses near 14%. The erosion is not just a paper statistic; it translates into meaningful declines in the purchasing power of outstanding government debt, effectively lowering the real value of that debt over time.
Beyond looking at bond prices, the paper highlights a relative performance gap: cumulative bond returns during these episodes trailed the broader market—stocks and real estate—by more than 20 percentage points over the same horizon. That disparity undercuts the usual narrative that debt and equities reliably move in opposite directions during crises.
As a practical matter, inflation plays a central role. When the price level climbs sharply, the fixed cash flows from bonds lose momentum in real terms, and even when nominal yields rise, the real return can still be negative if inflation accelerates more quickly than yields adjust. The result is a double hit to bondholders: lower real yields and higher uncertainty about future payments.
Why This Matters Now
Today’s debt landscape in the United States and other advanced economies resembles the study’s longstanding pattern: high debt, volatile inflation, and ongoing geopolitical frictions keep investors on edge. The United States, for instance, has faced sustained budgetary pressures amid larger deficits, war-by-war spending decisions, and the inflation dynamics that followed the Covid-19 era. While policymakers blend tax measures, spending controls, and monetary policy to manage the path, history suggests debt markets will remain sensitive to fiscal shocks and inflation surprises.
For everyday investors, the takeaway is not a call to abandon bonds but to recognize their limits as crisis hedges. The CEPR researchers caution that a crisis tends to alter the expected behavior of bonds, sometimes pushing them into the same risk universe as other high‑volatility assets. In other words, the traditional refuge narrative for government debt can crack under sustained geopolitical stress and inflation spikes.
As the authors put it, the underlying message from centuries of data is consistent: wars and large-scale emergencies tend to turn bond markets into challenging terrain for real returns. The refrain they highlight—years wars show they—captures a recurring theme across eras: debt investors face meaningful risk when crisis forces government budgets higher and currencies weaker.
What This Means for Investors Today
Strategists and financial planners are weighing the implications for portfolios that rely on fixed-income ballast. The study’s findings do not imply that government bonds are useless; rather, they underscore the need for dynamic asset allocation, mindful duration management, and diversification that cannot hinge solely on traditional Treasuries during crisis windows.
Advisors may consider the following implications, grounded in long-run evidence but applied to today’s markets:
- Balance duration: Short- to intermediate-term Treasuries can reduce sensitivity to sudden rate moves, but investors should be prepared for inflation surprises that erode real returns.
- Inflation protection: Securities with built‑in inflation protection or linked coupons can help guard purchasing power when crises push price levels higher.
- Asset diversification: A mix of real assets, equities, and select alternatives can provide a more resilient return profile during prolonged crises.
- Managed risk in crisis windows: Tactical shifts toward higher-quality or more liquid exposures may help navigate periods of fiscal stress when markets are volatile.
In practice, the message of the CEPR study is a reminder that the debt market’s risk‑return dynamics are deeply influenced by the political and inflation environment. The phrase years wars show they is not just a historical footnote; it’s a lens for interpreting today’s bond prices and future returns in the face of sustained uncertainty.
Data Snapshot
- Average real bond losses in the first four years of major conflicts: about 14%.
- Cumulative bond returns versus stocks and real estate: more than 20 percentage points lower over the same crisis horizon.
- Spending during conflicts: government outlays rise sharply, with estimates around 7% of GDP in the initial crisis years in the cross-century sample.
- Inflation’s role: higher inflation compounds the erosion of real value in fixed‑rate debt instruments during emergencies.
Bottom Line
For investors, the historical takeaway is that government debt does not always serve as a stable shield in times of crisis. The 300-year view from the CEPR study shows that wars and pandemic-scale events frequently deliver real losses to bondholders, sometimes outpacing gains in equities and real assets. The key is to recognize that times of major turbulence amend the risk calculus for debt instruments, and to build portfolios with a broader set of tools to navigate inflation, fiscal shocks, and shifting policy responses.
As the timeline of global tensions continues to unfold, the data-driven lesson remains relevant: the history of years wars show they demand a disciplined, diversified approach to risk—one that does not rely on government bonds alone to weather the next crisis.
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