The war that bond markets did not perceive as such : the prices of South African bonds during the Second Anglo-Boer War: an extreme case of resilience

When a conflict breaks out, warring states' bond prices generally experience sharp declines. As military defeat may prompt the winner to ask for reparations, bonds issued by the losing party are usually even more affected. By contrast, during the Second Anglo-Boer War (1899-1902), the prices of the bonds issued by the South African Republic never fell below 96% of par and this despite the fact that the public believed South African defeat could not be avoided. We attribute this observation to investors' belief that a British victory would lead to the assumption of the South African debt by the victor. Historical precedents and archival evidence show that this was by no means a foregone conclusion. Our analysis reveals the important role played by Rothschild, the underwriter. When the bond was first issued, Rothschild signalled that should a war break out the bond would be repaid. Once the war became reality, Rothschild was instrumental in making sure Great Britain would take over the loan.