lower in crisis-prone decades. Furthermore, the risk-return properties are in line with those of other tradable assets, in particular US and UK equities for which we also compute returns over the 200-year sample.

The results go a long way in solving a puzzle that has preoccupied the literature for decades – namely, why sovereigns can borrow again despite a history of default (Reinhart, Rogoff, and Savastano 2003; Cruces and Trebesch 2013).<sup>6</sup> High-risk countries that defaulted often manage to place bonds quickly postdefault. In 2016, Argentina re-accessed international markets only months after exiting its seventh default. The new issues included a 100-year bond, which led market observers to conclude that credit markets were overheating.<sup>7</sup> In the past years, Africa had its own issuance boom, as formerly highly indebted poor countries (HIPCs) such as Ghana or Zambia easily placed bonds abroad. Our historical results help to make sense of these market outcomes, as this asset class is characterized by a high return-to-risk ratio. This helps our understanding of why sovereign debtors can undergo repeated cycles of over-borrowing, often followed by default and a subsequent market re-entry (i.e., serial default).

Our paper departs from the literature on sovereign debt in three main ways. First, we take a different perspective – that of an investor. The bulk of the existing work takes the borrowing countries’ perspective, often focusing on the determinants and costs of default.<sup>8</sup> The second is the extensive time span and geographical coverage of our study; earlier work on creditor returns has studied short samples or a limited number of countries. The third is the granularity of our data, as we trace the financial history of more than 1,500 individual bonds at a monthly level, combining historical data on bond prices, coupon payments, and haircuts due to default. The result is the most ambitious dataset of sovereign debt to date, taking further the work of Lindert and Morton (1989), Homer and Sylla (2005), and Obstfeld and Taylor (2005), among others.

We are the first to quantify the returns on external sovereign bonds with long-run pricing data, despite the fact that this is one of the largest and oldest asset classes worldwide.<sup>9</sup> The likely explanation is data limitations. Studies on long-run asset returns typically use annual data of representative benchmark bonds or aggregate indices (e.g., Dimson, Marsh, and Staunten 2001; Jordà et al. 2017).<sup>10</sup> This standard

> 6 Eaton and Gersovitz (1981), among others, assume permanent exclusion after a sovereign default, which is at odds with the data (see also Aguiar and Gopinath 2006; Panizza, Sturzenegger, and Zettelmeyer 2009; and Cruces and Trebesch 2013).

> 7 See Financial Times, June 22, 2017, “The rush for Argentina’s 100-year bond points to an investment bubble.”

> 8 For surveys, see Panizza, Sturzenegger, and Zettelmeyer (2009), Aguiar and Amador (2014) and Mitchener and Trebesch (2021).

> 9 Historically, bonds issued by foreign governments accounted for about 10% of all financial assets trading in London (Michie 2001). Today, foreign-currency sovereign bonds continue to be a dominant asset class, especially for emerging markets. For 2017, the BIS reports a stock of US$1.9 trillion of external sovereign bonds (BIS 2018), about the same as total German government debt or about 10% of total gross US government debt.

> 10 Dimson, Marsh, and Staunten (2001) gather annual data on equities, bonds, and bills for 16 countries back to 1900. Their data on government bonds mostly builds on representative domestic currency instruments. Jordá et al. (2017) compile yearly country-level indices of asset returns, 1870-2015, for 16 countries, including housing.

2