What to do when safe havens turn into stormy waters

A safe-haven asset can retain or even gain value during market turbulence or stock market downturns. They are widely accepted and easy to sell, even during crisis periods, as they tend to be relatively insensitive to new information about whatever is causing the panic. In the long run, safe-haven assets keep their value in real terms.

Government debt has long been seen as a natural safe haven. However, investors have begun to question governments’ willingness or ability to pay back bondholders without causing high inflation, which reduces their safe-haven status. At other times, central bank policies keep interest rates below inflation, reducing their long-term store of value.

Several episodes in the past three years have cast further doubts. The Covid pandemic prompted governments to take unprecedented fiscal measures to counter the economic impact of lockdowns, causing deficits and government debt levels to reach new highs, raising concerns on debt sustainability.

The role of government bonds as a hedge against equity market volatility was further challenged in 2022, when they posted large negative returns during that year’s stock market falls, offering little diversification benefits. The UK Gilt market experienced its own crisis in September 2022 when the proposed budget of Liz Truss triggered a sell-off in the vast liability-driven investment market, leading to her resignation as prime minister.

More recently, French government bonds (OATs) came under pressure after President Macron called for snap elections in June 2024. This surprised bond markets and caused the yields on OATs to widen significantly versus German Bunds.

The eroding safe-haven status of US Treasuries

To assess whether the safe-haven status of US Treasuries has truly been compromised, we began by compiling an overview of historical equity market corrections exceeding 15% over the past 60 years. We then analyzed the performance of 10-year Treasuries during these corrections. Figure 1 below illustrates a total return of approximately 2.5% during the nearly 20% correction in the S&P 500 that began in February 2025 and ended on 9 April.

This 2.5% return stands in stark contrast to the high returns seen after the dotcom bust (2000/2001) and the Global Financial Crisis (2008/2009), when the Federal Reserve significantly lowered short-term interest rates. However, it is notably better than the 16.7% negative return in 2022, when the Fed aggressively raised rates in response to high inflation, and better than the returns during the 1960s and 1970s, when high or rapidly rising inflation caused similar issues.

At first glance, 10-year Treasuries thus appear to have fulfilled their expected role: preserving capital or delivering a positive return during a significant equity market downturn. However, a closer look at the panic phase of the correction – late March to mid-April 2025 – reveals a different picture. During this period, 10- and 30-year bonds failed to perform their safe-haven function.

In fact, the correlation between equity and bond returns turned from negative to positive. Interestingly, the equity/bond correlation for 2-year Treasuries remained negative (see Figure 2 below), indicating that short-term bonds continued to act as safe havens. This is somewhat surprising, given that the trade tariffs announced in early April – though temporarily inflationary – would have been expected to impact shorter maturities more severely.

Highly rated corporate bonds can sometimes have lower interest rates than government bonds but are not reliable safe havens. This is due to their small volume and sensitivity to changes in credit risk, which is in turn vulnerable to a changing macroeconomic landscape. Their liquidity tends to dry up during crisis periods, and so they may not be good stores of long-term value during times of financial repression.

Inflation-linked bonds protect against inflation but also tend to become less liquid during crises due to limited supply. They are however a relatively new asset class, and future scenarios with increased inflation risk may increase their safe-haven status, especially due to their long-term store of real value.

Defensive stocks that supply essential goods such as food, utilities, and health care have lower risk. Table 1 shows that defensive equities outperformed the general equity market during large drawdowns on average by more than 10%. They are less prone to long-term real value erosion than government debt or cash, and may therefore be a better store of value.

Turning to gold for millennia

And then there is gold, which has historically been used as a foundation for paper currency systems due to its rarity, durability, and ease of transaction. It has maintained its value over millennia; banks recognize gold as Tier 1 capital under Basel regulations. However, gold can be stolen and does not generate income, incurring storage costs instead.

Table 1 shows that during Global Financial Crisis, gold outperformed all other asset classes. Commodities, which are dominated by energy products such as oil, also tend to perform well during crash periods, such as in 2022 when the Russian invasion of Ukraine caused oil and gas prices to soar.

Finally, traditional currency markets such as the US dollar and Japanese yen perform well during equity drawdowns. Since its introduction, the euro has not been such a good safe haven as the other two currencies, but it outperformed in the last drawdown caused by the Trump tariffs. A stealth erosion of international USD reserve holdings has been ongoing for the last decade.