When the Ultimate Refuge Turns Risky
Sovereign bonds have gone from a traditional haven to a financial system fault line as government debt has expanded.
Investors need another place to hide out.
Photographer: CasarsaGuru/iStockphoto/Getty Images
Until the financial crisis of 2008, government bonds were the traditional haven for investors. More than a decade on, their nature has fundamentally changed. In any future crisis, sovereign debt will be a propagator of risk rather than a refuge.
Government debt has reached levels not seen outside of major wars. In advanced economies, it has risen to more than 100% of gross domestic product, from around 70% before 2007. The increase is the result of governments taking debt on to their balance sheets to finance bailouts of vulnerable financial institutions, and of deficit spending to prop up growth. Domestic government bond portfolios are large relative to banking system assets in Japan and several countries across Europe.