Developed government bonds
| Real return | Long term about 1% +- 1%, medium term 1% +- 3%, short term about the term premium |
| Volatility | 5% +- 1% |
| Correlation | 0.3 to equities on average, higher during inflation, negative during crisis |
| Testfolio | TLTTR |
| Inflation | Nominal and interest rate risk |
(Numbers on the basis of 10 year duration)
Developed market government bonds such Treasuries, Bunds and JGB are considered very safe with extremely low default risk. Their main risk is interest risk, which scales about linearly with bond duration. The compensation for this risk is called the term premium.
The term premium can be estimated by several models:
Interest rates change slowly due to economic changes, but can change rapidly for two main reasons:
- Economic crisis: war, disease, or financial crises that stall the economy often lead to decreases in the interest rate, increasing the value of existing bonds.
- Inflation: Inflation, either due to demand or supply shocks, often leads to increases in the interest rate, decreasing the nominal value of existing bonds, let alone real value.
As such the correlation with the equities can be conditionally very high, either negative or positive.