What is a safe haven now?

What exactly constitutes “safety”?

A range of characteristics are broadly agreed to be good indicators of a safe haven. While investors may weigh these differently, these features provide context for why certain assets have historically behaved defensively during times of uncertainty. These are:

Liquidity and accessibility: must be highly liquid and tradable on the global stage, with limited price impact

Stable demand: should have persistent demand for per­ceived security, helping to limit the impact of market downturns lead by risk assets

Negative or low correlation: low, or ideally, negative correlation to ‘risk-on’ assets such as equities means they hold or gain value in times of market stress

Capital preservation: primary role is in protecting capital for defen­sive portfolio positioning, rather than for their growth potential

Developed market government bonds

For decades, government bonds have served as the ultimate safe-ha­ven asset, offering stability and negative correlation to equities during market stress. That status is increasingly being questioned as prime issuer nations like the UK and the US grapple with relentless fiscal challenges that are eroding away the perception of them being ‘risk-free’. This once unquestioned assumption is now being tested as the threat of persistent inflation has forced markets to reassess the attractiveness of future returns based on promises made in nominal terms, but lived in real terms.

Mounting concerns over govern­ments’ ability to responsibly handle debt obligations – coupled with increased spending – has seen bond yields surge worldwide. Nowhere is this more symbolic than in Japan, where once near-zero rates have given way to a gradual uptick, with their 40-year bond yield making headlines due to surpassing 4% for the first time. This is a marked change from decades of perceived stability, driven by the newly appointed prime minister Takaichi’s fiscal spending plans. All of this has repercussions for the risk lens through which government bonds as an asset class are starting to be viewed.

In the US, Treasury ownership has shifted from global institutions and central banks toward yield sensitive domestic investors such as banks, money market funds, and hedge funds, who demand compensation for rising fiscal uncertainty. During the current war with Iran, this dynamic was evident as markets exerted upward pressure on bond yields. Meanwhile, the government is finding new avenues to keep demand steady. For example, stablecoins – cryptocurrencies designed to maintain a constant value by pegging to assets such as the US dollar or short‑dated Treasury bills – are expanding rapidly, enabled by sup­portive regulation.

As issuers accu­mulate growing volumes of T‑bills to back these coins, they are reshaping demand for US Treasuries and intro­ducing a new channel of potential market volatility. This underscores the need to maintain exposure to a basket of bonds as diversification within developed market government bonds (hedged back to the investor currency) will help to mitigate con­centrated exposure to fiscal risks.

Orthogonal strategies

Other strategies, such as cross-as­set momentum, are designed to target sources of return that are uncorrelated with traditional assets. They exhibit a mix-and-match quality of safe-haven characteristics: some offer strong diversification and low correlation, while others differ in liquidity, stability, and capital preservation, making the category diverse rather than uniformly safe-haven. The most important safe-haven quality these strategies possess is their low or negative correlation with equities and bonds, especially during periods of market stress. Naturally, such approaches are only as sound as the method ology used to underpin them. Nonetheless, as portfolio overlays, they can be an effective tool in any risk-management arsenal.

PruFund’s approach – one anchor won’t hold in every tide

Recent moves in perceived safe‑haven assets – drifting away from the correlations we would ordinarily expect – reinforces our conviction in the need for com­prehensive, robust diversification. With increasingly complex market dynamics and liquidity squeezes at play, it’s no longer sufficient to solely rely on strategies that worked well in the past.

• As an asset class, government bonds remain a cornerstone of stability, yet the importance of distributing exposure across major developed markets has grown markedly. Doing so provides a mean­ingful hedge against fiscal strain and currency risk.
• Gold retains its relevance as an asset untethered to government solvency. But its behaviour has become more volatile – evidenced by a 10% downturn in late January, triggered by Trump’s nomination of Kevin Warsh as the Federal Reserve chair. The fact it increasingly moves in tandem with equities, reflects a more speculative char­acter that makes its ‘safe-haven’ status less consistent.
• While non-traditional “orthog­onal strategies” may not fit the classic definition of safe-haven, they offer innovative ways to stay invested as market dynam­ics and investor expectations evolve. Importantly, they fit the bill of low correlation and capital perseveration which is most important to multi asset investors.

In summary, portfolio resilience today demands a multi‑dimensional approach – one that acknowledges the shifting behaviour of traditional safe havens while embracing a wider set of tools capable of absorbing shocks across a range of economic regimes. As such, there is a place for orthogonal strategies which seek to add a further layer of diversification against mainstream assets.