Next year will see the 850th anniversary of one of the most important financial innovations ever conceived: the invention of the government bond.
It was in 1167 that the Republic of Venice became the first modern state to borrow from its citizens in a formal manner, taking a loan from ninety of its leading families. Within a few years, the terms of such loans had begun to be standardised; and within a century, a lively trade in discrete tranches of the consolidated national debt was being carried on at the foot of the Rialto bridge. The global government bond markets had been born.
Over time, such sovereign borrowing became a hallmark of the most economically advanced nations, and the most important means of affording individual citizens a share in their general prosperity. By the end of the twentieth century, a vast financial infrastructure had been constructed furnishing pensions to the deserving retired, insurance to the daring entrepreneur, and income to the thrifty saver and the idle rentier. It was all built on the foundations of government bonds: the risk-free asset, whose returns rely not on the shifting fortunes of any individual company, but on the health of the economy as a whole and the quality of the sovereign’s policies.
Since 2008, however, the feet of this mighty Colossus have turned to clay. In the G10, the average yield on the benchmark 10-year bond has shrivelled from 4.3% in mid-2007 to 0.5% today. Developed economy government bond markets are in a coma: nearly $12 trillion-worth of government bonds now trade at a negative yield.
Yet all is not lost for sovereign bonds. Quite the opposite, in fact.
I explain how and why government bonds should remain central to the plans of income-oriented investors in an op-ed in The Financial Times published on July 12, 2016.