Portfolio Adviser • Portfolio Adviser May 2025 • Safe-haven’ assets

After the US president’s tariffs took a sledgehammer to world markets, Christian Mayes asks if the ‘safe-haven’ status of US bonds is irrevocably damaged and, if so, are there reliable alternatives investors can turn to?

Source: Morningstar Direct, Treasury.gov; FE fundinfo, London Bullion Market Association

The role of US treasuries and the dollar as the world’s preferred ‘safe- haven’ assets has come under heightened scrutiny following an extraordinary period in markets. After US president Donald Trump's 2 April unleashing of tariffs on America's global trading partners, equity markets promptly went into freefall.

Usually, investors would expect treasury yields o fall in this scenario, but instead they spiked. While equities have largely picked up since Trump announced a 90-day pause on the measures, the president learned a similar lesson to ex UK prime minister Liz Truss in being brought to heel by the bond market.

As Trump reaches 100 days of his second term in office, is the damage to US treasuries’ safe-haven status short term, or are wider issues at play?

Sotirios Nakos, multi-asset portfolio manager at Aviva Investors, says the recent behaviour of US treasuries has cast doubt on their safe-haven status.

“Historically, their risk-reducing aspect has been linked to periods of US or global growth slowdown, prompting monetary policy reactions such as rate cuts or quantitative easing. However, the past couple of years have been less growth-dominant compared with the pre-Covid period.”

Nakos says in order to assess whether US treasuries can still act as a safe haven, asset allocators should consider three key questions.

“Do inflation expectations remain well-anchored, allowing the Federal Reserve to prioritise the maximum employment part of its dual mandate?

“Second, are fiscal risks well-contained, given that increased issuance and deficits are associated with higher-term premia? Finally, are we in a well-functioning market environment where macro fundamentals are in the driving seat?

“Currently, no one can confidently answer ‘yes’ to any of these questions. Since the shocks are policy induced, it is less logical to expect the Fed to counter- act them. Inflation risks still exist, with tariffs posing an additional threat to price stability.

“The fiscal deficit remains very high, and there is little visibility on the US fiscal budget at this stage. Additionally, the ongoing announcements around trade policy has generated increased market volatility, leading to the unwinding of large positions and erratic price behaviour.”

At the same time, the probability of a recession in the US has been rising. Nakos adds, as hard economic data deteriorates, policy clarity increases and markets stabilise, treasuries will likely regain their risk-reducing properties.

“This will be more evident in shorter-maturity treasury bonds, which tend to be more influenced by monetary policy. But for now, market participants are left contemplating the answer to those three questions.”

The magnitude of the movement in bond markets last month was intensified by technical factors, such as the unwinding of basis and swap spread trades heavily used by hedge funds, which may have influenced the selling of US government bonds.

Despite this, Rebekah McMillan, associate port- folio manager – multi-asset at Neuberger Berman, says there are structural challenges ahead for the dollar and treasuries stemming from Trump’s unpredictable trade policies, with focus turning to rising fiscal deficits and geopolitical instability, reducing investor confidence.

“The US has benefited from a strong multi-year tailwind of foreign investors purchasing assets. If we see a significant repatriation of capital resulting from increasingly protectionist policy stances, this could represent a more structural shift,” she adds.

We are therefore neutral on US treasuries, though emphasise diversified exposure to the broader fixed-income market can offer downside protection amid market volatility.”

The mounting US fiscal deficit and what it could mean for the treasury market has been of increasing concern to investors, with the market currently mispricing the risks embedded in US government debt, according to Tony Trzcinka, portfolio manager at Impax Asset Management.

“A persistent budget deficit and mounting national debt risk stymying US economic growth, limiting fiscal headroom and fuelling inflation. In this context, we think fixed-income investors should approach US treasuries with caution and look to immunise their portfolios from these threats.”

While the market movements may be a concern for some investors, BNY Emea market strategist Geoff Yu emphasises context is key when it comes to assessing whether treasuries are still a safe haven.

“The dollar and the US treasury market has continued to hold up well. During the more extreme periods of market volatility, we noted cross-border investors were buyers of US treasuries in the 10-year plus part of the curve.

“This suggests value has come through as these levels in yields were beyond normal expectations. Similarly, while the dollar has struggled against some G10 names, risk-off generated strong dollar interest against emerging market currencies as well.

“Throughout the past cycle the dollar can be a ‘risk’ and ‘safe haven’ simultaneously, depending on where the opposite exposure lies.”

While Trump’s so called ‘liberation day’ may have been the catalyst for volatility, Federated Hermes senior portfolio manager John Sidawi suggests US assets have not been acting as a safe haven for the better part of 2025, with dollar weakness first emerging in January as a result of traditional economic drivers. At that point, its safe-haven characteristics were yet to be challenged.

“In late 2024, US economic activity seemed impermeable and European data was already in deep contraction. In the early weeks of 2025, both of these rends went into reverse as US activity started to wane, while European data began to improve.

“This economic divergence set the stage for US dollar weakness, which had already been over-valued off a number of metrics. But overvaluation means little without a catalyst.

“European relative value arguments had been in place for years, but the thesis lacked an incentive. These catalysts finally arrived in the form of US-imposed tariffs and landmark fiscal expansion in Germany. The two conditions provided the fuel for relative valuations to begin to normalise in favour of Europe. ‘US exceptionalism’ had come under scrutiny and prompted the rebalancing of years of US-concentrated foreign investments back home.”

So, as investors look to diversify their US exposure, other government bonds are proving resilient, with bond fund managers positioning for Europe’s recent outperformance against the US. In April, three of the top five fund sectors for performance were European fixed-income focused following the bund’s strength.

“Investor perception of US treasuries, and of US assets in general, has changed,” says investment manager Colin Finlayson of Aegon Asset Management. “At least in the short term, I think there is a bit of hesitancy for your average investor to consider if they still want to own US treasuries.

“Is it going to give them what they need it for, which is that degree of certainty and security over their investment?

“This may pass, we may work through this weird Trumpian nightmare we’re currently in and then the US treasury market and the dollar may go back to being the bedrock of the financial system. But for now, there is definitely a sense that it’s not the only option anymore.”

Trump’s trade policy announcement comes at a time where Europe is looking more attractive following Germany’s decision to unshackle its purse and pump government money into defence and infra- structure. “You’re seeing a decent outperformance of German bunds over US treasuries,” Finlayson adds. “All it takes is for some of the major central banks, rather than buying another treasury, to just buy something else.

“We’re still quite some way from a completely new world order, where the US loses that privileged position it’s got as the cornerstone of financial markets, but at the margins, I think there’s a willingness for people to look elsewhere in terms of their investment allocation.”

Federated Hermes’ Sidawi agrees, noting: “German bunds have recently been displaying greater stability than their US or UK counterparts. We also favour core European bonds over the European peripheral equivalents.

“The fragility of the UK fiscal outlook prevents us from recommending gilts as an alternative hedge to volatility, however.”

In terms of duration, Nedgroup head of fixed income and strategic bond fund manager David Roberts says shorter is the answer in the current environment. “Almost irrespective of which country you’ve been in, the lesson has been to not buy long-maturity bonds. It doesn’t mean have no duration, but try and have the bulk of your portfolio at five- or six-year securities. That’s been the sweet spot in the current market.

“Duration, at the moment, is not the key driver and certainly from our perspective, we’re focusing more on the geographic breakdown, and then where we are on the interest rate curve.”

Similar to treasuries, the dollar itself has also traditionally been viewed as a go-to safe-haven asset. With Trump’s trade policy also causing weakness in the dollar, however, Sparrows Capital CIO Raymond Backreedy says investors may be turning to alternative currencies.

“The flip-flopping in the US administration and treasury stance on tariffs and macroeconomic policy has created substantial uncertainty with regards to US safe-haven assets.Consequently, other safe-haven currencies, such as the euro, Swiss franc and yen has seen a favourable flow in those directions as investors look elsewhere for diversification.”

However, BNY’s Yu suggests the rotation out of US assets may be overblown. He draws on insights from the firm’s IFlow platform, which compiles investor flows data from over $53trn (£39.9trn) assets.

“We acknowledge that exposures to the green- back are being re-evaluated, but for now there is no alternative to US-based assets. Lower price levels are not the same as loss of status, as these are separate discussions. For now, for asset allocators it’s about liquidity and accessibility,” he adds.

“The dollar can fluctuate but maintain safety status. For example, the franc is also seen as a haven, but its sovereign debt market is close to non-existent. Its extreme swings of late undermine the case already for safety status.

“Chinese government debt is attracting attention, but access channels are limited, though this is something Beijing is changing: offshore issues have taken place this year in Saudi Arabia, the UAE and more recently in Hong Kong, but the amounts are limited.”

Tariffs could have been positive for the dollar if they had been at lower levels, according to Sidawi. “But they were egregious. The dollar quickly relinquished its status as a harbour during stormy markets and geopolitical events.”

However, he says questioning a currency’s reserve standing is a far leap from questioning its temporary position in the shifting exchange rate ecosystem. “The US dollar’s reserve status is dependent on many factors, from America’s robust and liquid capital markets to its military strength; from its political stability to its ability to pay its debts. Unfortunately, the last two have faltered this year.

“Investors – domestic and foreign – are beginning to view the US as less able to shield them from price variance and other factors, especially due to the size of its federal budget deficit and national debt. The US treasury market is the proxy for the dollar here, and if investors begin to demand higher termpremia, it would suggest a loss of confidence that may be impossible to regain.

“The result could be damaging, as it would make it more expensive for the federal government to pay down debt and harder to stabilise the dollar’s value. The dollar likely will remain king for many years, even decades. But it might cost us more.”

At the same time as global equity markets were plummeting, gold reached new all-time highs in April as investors sought shelter in the traditional safe haven. Gold has been utilised as a store of value in periods of uncertainty and the price of the commodity reached $3,500 before easing back down. Amid the recent volatility, it has surged, setting 25 new all-time highs in 2025.

Neuberger Berman’s McMillan advocates for the inclusion of alternatives and ‘non-traditional’ diversifiers within portfolios, particularly as higher inflation volatility has led to increased positive correlations between stocks and bonds.

“Gold has been high conviction, and we continue to see it as a key beneficiary of ongoing geopolitical, political and trade uncertainties, as well as the weakening US dollar.”

“It is an obvious and prominent safe haven in the current environment, but we question its long-term viability for non-income generating qualities,” says Federated Hermes’ Sidawi. “The outlook for precious metals should correlate with the trajectory of gold valuations but are much more vulnerable to a global growth slowdown.”

Sarasin & Partners Kynge adds gold holds the attractive position of being a safe-haven asset that doubles as an inflationary hedge and a viable alternative reserve asset to the US dollar. He notes this has been key to recent price performance, as central banks are preferring to hold gold instead of US treasuries, with the former unable to be targeted by US sanctions.

Beyond gold and other commodities, McMillan says insurance-linked assets such as catastrophe bonds can offer diversifying returns, completely uncorrelated to global economic growth.

“Hedge fund strategies such as global macro or event-driven can harvest tactical opportunities and exploit market dislocations, offering diversification of market beta. Finally, private assets such as real estate and infrastructure can provide some shelter from mark-to-market volatility, capturing illiquidity premium while delivering long-term resilience, steady income and some inflation protection.”

Money market funds have enjoyed strong flows over the past two years as investors took advantage of the higher yields on offer as a result of increased interest rates. The asset class invests in short-term bonds that are due to mature soon, so investors can earn income on cash with less interest rate sensitivity than conventional bond funds. Due to its cash-like qualities, money markets can often attract flows during periods of market turmoil.

“In most developed markets (ex Japan), money market funds continue to offer an attractive alternative to government bonds for the next 12 months,” says Tom Kynge, portfolio manager at Sarasin & Partners. “The shape of the yield curve – higher at the front and long end but depressed in the middle – means money market funds offer yields that are only slightly lower than those provided by 10-year government bonds.

“Given the elevated levels of policy uncertainty at present, and expectations that the reordering of global supply chains has the potential to cause inflation, money market funds offer a stable alternative to long-term bonds.”

Kynge adds cash-like instruments have become more attractive for multi-asset portfolio managers since Covid due to the higher level of correlation between bonds and equities in recent years.

“In this sense, bonds have often failed to provide the defensiveness and diversification that are required when equities sell off. For these reasons, cash-like instruments have become relatively more attractive.”

Despite their capital-preservation qualities, Aviva Investors portfolio manager Sotirios Nakos says the opportunity cost of holding cash has increased due to lower cash yields and more attractive valuations on risk assets.

“Admittedly, investors should be cautious about staying in cash for too long,” he says. “Diversifying the timing risk of adding exposure to risk assets is key, but not without holding the necessary cash to meet redemptions.

“Additionally, the unstable correlations between ‘safe-haven’ and risk assets make it difficult to rely on correlation to reduce portfolio volatility, which makes using cash a clear volatility-reducing alternative. This balanced approach can help manage the trade-off between capital preservation and the potential for higher returns.”

Rebekah McMillan, associate portfolio manager, multi-asset at Neuberger Berman, also warns the path of monetary policy moving forward will likely see the appeal of money markets reduce.

“Money market funds have ballooned in size as investors seek a safe store of capital, and while short term we understand the appeal at current yield levels, their relative attractiveness diminishes as interest rates trend downwards. Given central banks have signalled that rate cuts can be delivered quickly in the event of a negative growth shock as a result of trade conflict, now represents a good time to put capital to work."