Perspectives: What happens when safe havens are no longer safe?

There has tended to be a relatively close relationship between the US dollar and US government bond yields over recent years. A strong economy leads to higher yields and inflows of foreign capital, thereby supporting the US dollar (and this tends to work in reverse in a weaker economic environment). Until recently that is, as the chart below shows, that relationship has broken down and, in fact, can be traced back to “Liberation day” in early April.

The relationship between higher Treasury yields and stronger US dollar has broken:

Source: Bloomberg Finance L.P – 11.01.2022 – 02.06.2025
Past performance is not a reliable indicator of future returns.

Since Liberation day, Treasury yields have risen and the US dollar has weakened. Why might this be? We believe it is the combination of elevated policy uncertainty and the growing burden of twin deficits that is leading to fading US exceptionalism.

In terms of asset class impact, this is bearish for the US dollar and US Treasuries, and is driving this behavioural change between two of the world’s most important asset classes. In short, the market has started to price in that the new administration’s policies are damaging to domestic fundamentals in the US.

Stepping back, this can also be seen through the lens of the lifecycle of empires. From a pretty simplistic perspective, a relatively open trading system will tend to benefit the largest economy the most. This is what we have seen since the end of the war period, with the US benefiting materially. However, for the first time during the US empire there is now an economic competitor, in the form of China, and it suits the US to have a less open trading system. However, over the longer term, weaponising US economic and political influence will lead to the rest of the world moving away from the US.

As investors in global multi assets, we also consider these dynamics from a portfolio construction perspective. Many global investors have become accustomed to thinking of US Treasuries and the US dollar as safe havens and, to be fair, they have often done a decent job in this regard, and over extended periods. However, we think these roles are increasingly compromised due to the US empire lifecycle stage and related heightened policy uncertainty. On top of that, we have argued for some time that US Treasuries are not good diversifiers of equities in inflationary environments, like the one we are in currently.

From an investment perspective, the end of US economic leadership is likely to lead to ructions in economies and financial markets, though, as ever, understanding the timing of this will be difficult. Either way, an important question to answer is what will be the preferred store of value in periods of market instability? For our part, we are looking beyond the US dollar and US Treasuries to diversify equities. Indeed, across portfolios we have much less US dollar than normal and much less exposure to US Treasuries. Instead, we are diversifying away from US equities to ROW and we maintain our exposure to commodities, especially gold.