Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 70

Australia’s default: the winners and losers from bonds

Part 1 of this storycontained a brief outline of government debt – both domestic and foreign - and various ways in which governments can avoid repaying their debts in full, through default, restructure and/or inflation. We also looked at the level of Australian government debt compared to the current government debt crisis, and how it compares to Australia’s debt level today.

In Part 2,we looked at how Australia’s big default and debt restructure occurred, which bond holders were rescued, and which were forced to take a ‘haircut’ on their interest and principal repayments.

Here, in Part 3, here we look what it meant to bond investors, including the returns achieved by bond investors before, during and after the debt default and restructure. We will focus on returns to local investors on domestic Australian debt since they were the ones directly affected.

We see that money was made for bond holders, and even those who hung on and were hit with the ‘haircut’ restructure.

Returns were good for patient investors

The first chart shows monthly returns (top section) and cumulative returns (lower section) on domestic long term Commonwealth bonds from the start of 1929 to December 1932.

Bonds returned 13% in total over the four years, made up of 19.3% from total interest payments minus a 6.3% capital loss.

The next chart shows prices for long term bonds in both markets: domestic bonds in the Australian market (green line) and foreign bonds in the London market (red line). The lower section shows cumulative returns from interest on domestic bonds (blue bars) and cumulative capital value (red bars).

Patient investors who held onto their bonds, took the haircut deal, bought new replacement bonds, and then held them until the end of 1932, would have achieved total returns (i.e. interest plus capital gains/losses) of 13%.

A 13% total return over a 4 year holding period doesn’t sound very good, but after inflation (or deflation actually) it amounted to a healthy 30% real return because consumer prices had fallen by 17% over the period, and wages had fallen by around 10%. In terms of the real spending power of investors’ money after inflation, the 30% return over 4 years equated to 6.8% per year compound return after inflation. Not a bad return for patient investors, even after the default and restructure in 1931-1932.

A major contributor to the good returns was the fact that the new replacement bonds did not sell for par at auctions. They were sold at significant discounts to par because investors were still nervous about the government’s ability to service even the new lower interest payments. These discount purchase prices contributed to good returns as market prices quickly rose back up near par during 1932 as confidence returned and yields declined from crisis levels.

Winners and losers

On the other hand, investors who bought domestic 10 year bonds in December 1930 when yields were an attractive 6.4%, and then sold out in the panic in July 1931 when and the government was talking about default and bond prices had crashed 20% from £96 to £77, with yields soaring to nearly 13%, would have lost 18% on their investment.

Likening this to the current European debt crisis, investors who lend money to Greece at 100 cents in the dollar before the crisis (mainly European banks) and then panic sold in early 2012 at less than 20 cents in the dollar before the restructure was announced, would have lost 80% of their money. These were permanent losses. The big winners in Greek debt were the numerous hedge funds that bought up Greek bonds from the panic sellers at prices as low as 15 cents in the dollar in early 2012, and then doubled their money when the old bonds were exchanged for new bonds an average of around 33 cents.

There are winners and losers in all markets. Even when governments default on their debts there is money to be made by investors who resist the temptation to panic sell in a crisis (and also resist the temptation to panic buy in a boom for that matter).

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

 

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

 


 

Leave a Comment:

RELATED ARTICLES

Less than 1% for 100 years: watch the price risk on long bonds

Australia’s default: shares versus bonds through the crisis

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.

100 Aussies: seven charts on who earns, pays, and owns

The Labor government is talking up tax reform to lift Australia’s ailing economic growth. Before any changes are made, it’s important to know who pays tax, who owns assets, and how much people have in their super for retirement.

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. 

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.

Chinese steel - building a Sydney Harbour Bridge every 10 minutes

China's steel production, equivalent to building one Sydney Harbour Bridge every 10 minutes, has driven Australia's economic growth. With China's slowdown, what does this mean for Australia's economy and investments?

With markets near record highs, here's what you should do with your portfolio

Markets have weathered geopolitical turmoil, hitting near record highs. Investors face tough decisions on valuations, asset concentration, and strategic portfolio rebalancing for risk control and future returns.

Latest Updates

Retirement

The best way to get rich and retire early

This goes through the different options including shares, property and business ownership and declares a winner, as well as outlining the mindset needed to earn enough to never have to work again.

Shares

Boom, bubble or alarm?

After a stellar 2025 to date for equities, warning signs - from speculative froth to stretched valuations - suggest the market’s calm may be masking deeper fragilities. Strategic rebalancing feels increasingly timely.

Property

A perfect storm for housing affordability in Australia

Everyone has a theory as to why housing in Australia is so expensive. There are a lot of different factors at play, from skewed migration patterns to banking trends and housing's status as a national obsession.

Economy

Which generation had it toughest?

Each generation believes its economic challenges were uniquely tough - but what does the data say? A closer look reveals a more nuanced, complex story behind the generational hardship debate. 

Shares

Is the iPhone nearing its Blackberry moment?

Blackberry clung on to the superiority of keyboards at the beginning of the touchscreen era and paid the ultimate price. Could the rise of agentic AI and a new generation of hardware do something similar to Apple?

Fixed interest

Things may finally be turning for the bond market

The bond market is quietly regaining strength. As rate cuts loom and economic growth moderates, high-quality credit and global fixed income present renewed opportunities for investors seeking income and stability. 

Shares

The wisdom of buying absurdly expensive stocks (or not!)

Companies trading at over 10x revenue now account for over 20% of the MSCI World index, levels not seen since the dotcom bubble. Can these shares create lasting value, or are they destined to unravel?

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.