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Eight centuries of the risk-free rate: bond market reversals from the Venetians to the ‘VaR shock’

Based on a new dataset for the global risk-free rate in nominal and real terms since the year 1311, this paper will argue that the current global bond market does indeed show strong signs of a historically unusual price expansion since 1981. In the first part, nine major secular bond bull markets since the 13th century are identified, and the current price expansion placed into its (very) long-term context. Furthermore, the new dataset indicates that in July 2016 the global risk-free rate reached its lowest point ever. The second part of this paper proceeds empirically in its focus on notable “bull market reversals” in the 20th century, to investigate closer the more recent dynamics leading to sharp investor losses. We distinguish among (1) “monetary (mis-) communication reversals” in which central bank communication plays a central role, (2) non-fundamental, “curve steepening reversals”, and (3) fundamental, inflation-led reversals. While important idiosyncrasies exist, an eventual end to the current bond bull market could involve similar fundamentally-driven dynamics as experienced in 1965-1970.