Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 71

Australia’s default: shares versus bonds through the crisis

In the first three parts of this series over the last month, we have explored the ways governments can avoid repaying their debts in full; how Australia’s big default and debt restructure occurred in the 1930s; and the returns achieved by bond investors before, during and after the debt restructure.

In part 4, we look at the returns from the broad stock market versus the government bond market during the 1930s crisis. We see how the impact of the Greece-like default and restructure of government bonds affected bond returns, compared with the impact of the 1929 crash on share returns.

Bonds versus shares during the crisis

Despite the default and restructure for all domestic Australian bonds, bond investors who held on during the crisis (and refinanced their old defaulted bonds with new ‘haircut’ bonds), did better than share investors.

The chart below shows total returns (including capital gains/losses plus income) from the start of 1929 to the end of 1932. Share market returns are measured by the Sydney Commercial Index (the main index of large stocks across all of the main industries), including dividends paid. Bond returns are based on Commonwealth bonds maturing in five years or longer, including interest coupons.

For a snapshot of the key events during the period, refer to the chart in Part 2 of this series.

Income return was the same for shares and bonds but capital losses different

Share and bond investors received the same investment income over the four years: dividends from the broad share market gave investors 19% in total over the period, the same as the 19% interest paid on bonds.

The big difference was in the market prices of shares versus bonds. Share prices fell twice as far as bond prices, dropping 46% from the peak in 1929 to the bottom in August 1931. Share prices started to recover in September after the August 1931 debt restructure deal. The broad share index was still 20% lower by the end of 1932, whereas bond prices had recovered to par. However the 20% capital losses on shares were almost made up for by dividend income, leaving investors almost square after four years, and ahead 15% in real purchasing power terms after the general price deflation of 17% over the period.

These are very good investment returns for the four years during the worst of the ‘Great Depression’: 29% real total returns from government bonds, including the default and restructure, and 15% real total returns from shares, including the 1929 stock market crash!

Three phases of the crisis

There were essentially three phases of the crisis, and shares and bonds did different things in these three phases. The first phase was late 1929 to September 1930. During this phase share prices collapsed while bond prices remained strong. Investors dumped shares in the panic and bought government bonds as a ‘safe haven’. Some safe haven, as the government defaulted.

Share prices nearly halved over the period, which included the October 1929 ‘crash’, which was much milder in Australia than in the US because Australia did not have a wild speculative bubble in the late 1920s, and so there was no bubble to burst. Australia was already in recession, in 1928-1929, commodities prices had already collapsed, and credit markets had already dried up for Australia (thanks primarily to the profligate NSW government).

The second phase was between September 1930 and the August 1931 debt restructure. Share prices stabilised after the August 1930 ‘Mobilisation Agreement’ under which the commercial banks agreed to lend the Commonwealth government £3 million per month to pay interest on debt and to keep the government running. Shares stopped falling but bonds (the so-called ‘safe haven’) collapsed, all the way to the August 1931 default and restructure.

The third phase was after the August 1931 debt restructure, when prices of shares and bonds recovered strongly together.

Not only did Australian shares suffer less than US shares, they started to recover a year earlier than US shares. The main reasons were that Australia abandoned the gold standard and depreciated its currency more than a year earlier (from January 1930), and also because Australia did not go on a Keynsian debt-funded spending spree – because it was simply unable to borrow from domestic or international debt markets.

Investors’ worst fears were realised

As usual, the best returns were received from buying in the depths of despair, when there is ‘blood in the streets’. Investors’ worst fears were realised: the government failed to pay interest and principle on its entire stock of domestic bonds and notes. Interest payments were slashed 22.5% across the board and bond holders had to wait up to 30 years to get their money back. The ‘worst case scenario’ turned into fact, but returns were still very good for bond investors, even through the default and restructure.

The same was the case for the defaulted Greek bonds in 2012. The ‘worst case scenario’ came true – the government failed to pay and the debt was restructured in a ‘haircut’ deal, but there was still plenty of money to be made. Several hedge funds made a mountain of money buying off panicking investors at the depths of the crisis. The losers were the investors (mostly European banks and pension funds) that sold into the fear.

Australian investors, bonds and listed bonds

By the way, recently there has been much chatter in the ill-informed national media about Australians not being accustomed to bond investing, and also not being accustomed to bonds being listed on the stock exchange. This is complete nonsense.

The recent listing of bonds on the ASX is nothing new. Bonds were listed on Australian stock exchanges for more than a century. Bond-holding has exceeded share-holding for Australian investors for most of our history. In addition, bond trading has exceeded share trading on the main public exchanges in volume and depth for most of the history of stock exchanges in Australia.

Shares only overtook bonds as the preferred investment for Australians in the late 1960s, thanks to two main factors. The first was the speculative mining boom of the late 1960s, in which almost all of mining stocks that appeared in the boom promptly disappeared worthless in the crash that followed. The second factor was tax: specifically the removal of tax rebates on bond interest in 1969, followed by the granting of franking credits to shareholders in 1987. Australia is like almost all other ‘developed’ countries in the world, where bond investing has been more popular and more widespread than share investing for most of its history.

This concludes our 4-part story of Australia’s big government debt default.

 

Ashley Owen is Joint CEO of Philo Capital Advisers and a director and adviser to the Third Link Growth Fund.

 

RELATED ARTICLES

Australia’s default: who do you rescue?

Australia’s default: A primer on government debt, default and inflation

A world out of sync with inflation

banner

Most viewed in recent weeks

Raising the GST to 15%

Treasurer Jim Chalmers aims to tackle tax reform but faces challenges. Previous reviews struggled due to political sensitivities, highlighting the need for comprehensive and politically feasible change.

7 examples of how the new super tax will be calculated

You've no doubt heard about Division 296. These case studies show what people at various levels above the $3 million threshold might need to pay the ATO, with examples ranging from under $500 to more than $35,000.

The revolt against Baby Boomer wealth

The $3m super tax could be put down to the Government needing money and the wealthy being easy targets. It’s deeper than that though and this looks at the factors behind the policy and why more taxes on the wealthy are coming.

Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

The super tax has caused an almighty scuffle, but for SMSFs impacted by the proposed tax, a big question remains: what should they do now? Here are ideas for those wanting to withdraw money from their SMSF.

Are franking credits hurting Australia’s economy?

Business investment and per capita GDP have languished over the past decade and the Labor Government is conducting inquiries to find out why. Franking credits should be part of the debate about our stalling economy.

Here's what should replace the $3 million super tax

With Div. 296 looming, is there a smarter way to tax superannuation? This proposes a fairer, income-linked alternative that respects compounding, ensures predictability, and avoids taxing unrealised capital gains. 

Latest Updates

Investment strategies

9 winning investment strategies

There are many ways to invest in stocks, but some strategies are more effective than others. Here are nine tried and tested investment approaches - choosing one of these can improve your chances of reaching your financial goals.

Planning

Super, death and taxes – time to rethink your estate plans?

The $3 million super tax has many rethinking their super strategies, especially issues of wealth transfer on death. This reviews the taxes on super benefits and offers investment alternatives.

Taxation

Raising the GST to 15%

Treasurer Jim Chalmers aims to tackle tax reform but faces challenges. Previous reviews struggled due to political sensitivities, highlighting the need for comprehensive and politically feasible change.

Shares

The megatrend you simply cannot ignore

Markets are reassessing the impact of AI, with initial euphoria giving way to growing scepticism. This shift is evident in the performance of ASX-listed AI beneficiaries, creating potential opportunities.

Gold

Is this the real reason for gold's surge past $3,000?

Concerns over the US fiscal position seem to have overtaken geopolitics and interest rates as the biggest tailwind for gold prices. Even if a debt crisis doesn't seem likely, there could be more support on the way.

Exchange traded products

Is now the time to invest in small caps?

With further RBA rate cuts forecast this year, small caps may be key beneficiaries. There are quality small cap LICs and LITs trading at discounts to net assets, offering opportunities for astute investors.

Strategy

Welcome to the grey war

Forget speculation about a future US-China conflict - it's already happening. Through cyberwarfare and propaganda, China is waging a grey war designed to weaken democracies without firing a single shot.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.