For the past 100 years, the US has offered investors ‘safe haven’ assets to turn to when market volatility spiked in the dollar and government-issued bonds. After all, the US was the richest country in the world, had a stable democracy and never defaulted on its debt.
This haven has fallen apart since so-called ‘liberation day’ on 2 April.
Global stock markets tumbled in the face of the chaotic US tariff announcements. Normally, in this situation foreign investors would rush to buy US Treasuries, pushing down yields and increasing the value of the dollar. Instead, since the ‘liberation day’ announcement by US President Donald Trump, the dollar has fallen 2 per cent against sterling while the 10-year US Treasury yield is up 20 basis points to 4.39 per cent, sitting as high as 4.56 per cent at the end of last week.
In part, the US Treasuries sell-off can be explained by the fact that Wall Street traders needed to raise cash quickly to pay off some leveraged bets that blew up due to the market volatility. But the dollar falling in value as well was unusual. “Normally, when Treasuries get sold off, people park their money in cash, instead of moving it overseas. This time, a bunch of investors actually pulled their money out of America entirely,” said economics writer Noah Smith.
The issue with the tariffs is not just the increased costs US consumers and manufacturers will face. It is the haphazard way they have been applied that has cast doubt on the US government’s reliability.
TS Lombard chief economist Freya Beamish said the breakdown in correlation between US equities, bonds and currency showed that the “post-1973 international monetary system is broken”.
Markets aren’t binary, they move on the margins. The recent moves don’t mean the US has suddenly become an unreliable debtor or that the monetary order is about to collapse. However, every time the US administration does something reckless, ignores a trade deal or flaunts norms, it increases doubt and pushes some investors to look for alternative safe havens.
Investors will now be waiting to see how the US administration responds. Trump’s tariff backdown after the bond and share market sell-off shows he is responsive to the market. If he continues to back down, starts following court orders and stops planned sweeping tax cuts, then bond yields would fall and the dollar would bounce back.
However, Beamish said the market is approaching a point of no return. “The administration is now halfway across the Rubicon,” she said, adding that “if Trump makes it all the way across, utter chaos will ensue”.
This would be likely to appear in the form of Trump firing Federal Reserve chair Jay Powell or looking to restructure US debt.
“Right now, the best bet is to go to Bunds, gilts and gold,” Beamish said. Notably in the week after 2 April even gold slipped, possibly as positions were liquidated to meet margin calls. Once the first wave of panic subsided, the yellow metal resumed its phenomenal bull run, ending 14 April at new highs above $3,200 an ounce.
For now, US democracy still functions. If Trump mismanages the economy he can be replaced by a more competent steward in three-and-a-half years, while a mid-term election in 2026 could limit his power by handing the US Democratic party majorities in the House of Representatives and the Senate.
The strength of a democracy is never the individuals but the system’s ability for self-correction. This is why borrowing costs are not higher. But every action that increases doubt in the system, undermines the perception of the US as a safe haven. Investors realise this and are increasingly diversifying. AS
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Japan’s famous Kyoto school of philosophy emphasises interconnectedness, a feature of financial markets that forced Trump’s hand in pausing punitive tariffs on allies. So, did eastern wisdom outfox Trump’s more reductive ‘Art of the Deal’ thinking on trade?
Although Japan is the biggest foreign holder of US Treasury bonds ($1.1tn as of the end of January 2025), finance minister Katsunobu Kato poured water on assertions that the holdings could be used explicitly as leverage. This approach mirrors Japan’s measured response on trade, but being a major creditor confers status, and it fronts the queue to seek a new accord with the US.
America’s need for trade deals gathers urgency as Treasuries are sold off.
Liquidity (the ease of matching buyers and sellers in a smoothly functioning market), remains a concern and US Federal Reserve officials have been moved to announce their readiness to undertake stabilising operations.
What happens at the margins in Treasury markets is crucial: although auctions of new 10- and 30-year Treasuries (on 9 and 10 April) were met with healthy demand, including from foreign central banks, the tumult on the secondary market could create challenges for future issuance.
Borrowers such as Japan don’t need to dump existing holdings to turn up the heat on Trump. Even declining to reinvest coupons and rollover positions in new US debt would be impactful.
That would contribute to a weakening of the US dollar, which is also reeling from the prospect of less trade being conducted in the currency. The greenback endured some of its weakest trading sessions in years versus other major currencies: sterling, Canadian dollars, Swiss francs and especially euros and the Japanese yen.
Countries diversifying away from US financial assets is an example of the portfolio balance mechanism, which is one of the prime contributors to countries with trade deficits seeing their currency devalue.
The US funds its trade deficits by issuing Treasuries, which are then often bought by foreigners. The dollars created make their way, via government spending or the financial system, to businesses and households, and much of the cash ends up spent on imports.
The US had roughly a $68.5bn trade deficit in goods with Japan in 2024. Japan also made $77.3bn in foreign direct investment into the US last year, more than any other country, according to Nikkei Asia. Therefore, it has been imperative for Japan to own a lot of dollars, but losing confidence in its trading partner is a reason to both pause investment and re-evaluate its exposure.
Jeopardy also exists for the holders of US debt, however, and Japan doesn’t benefit from the yen appreciating too much and compounding the hit to competitiveness from tariffs.
Even China, which still owns around $760bn in Treasuries (plus Hong Kong has $255bn) may view dumping American debt as the most extreme move: it would unleash forces on the global economy that may drastically impede its own options in the trade war.
In any case, volatile bond yields and a weakening dollar continue to up the ante for the US. That makes it essential for Trump to be conciliatory towards friendly nations such as Japan, and heed another Kyoto principle: that of cross-cultural understanding and dialogue. JN
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Bonds have had their share of volatility in recent weeks, and funds have not escaped unscathed. Just 42 of 519 funds in the Investment Association’s various bond sectors made a positive total return in the first half of April. But most names had losses of less than 3 per cent, a much better result than that of the S&P 500.
In a time when investors are questioning the credibility of US assets, UK government debt might be a simpler option than US Treasuries. Gilt funds have held up well, with the average portfolio in the IA UK Gilts sector down by 0.7 per cent.
Those wanting either short-duration or more generalist exposure have options. The Invesco Gilt 1-5 Year ETF (GLT5) is one cheap way of getting short-duration exposure, with a charge of just 0.06 per cent, while the Amundi UK Government Bond ETF (GILS) in our 2024 Top 50 ETFs list charges 0.05 per cent.
Like many generalist funds, the Amundi exchange traded fund (ETF) diversifies widely by maturity of the instruments it holds. Around 38 per cent of the portfolio was set to mature within five years as at 10 April, although almost 14 per cent had a maturity of more than 25 years.
Active options
Flexible bond funds offer active managers more tools with which to navigate the twists and turns of the market, and the portfolios in the IA’s Sterling Strategic Bond sector can differ notably.
To look at one name that fared well in recent weeks, Premier Miton Strategic Monthly Income Bond (GB00BMWVS003) largely focuses on investment-grade corporate bonds, or the higher-quality rung of corporate debt, with bank bonds making up a large chunk of the portfolio. Funds that focus largely on corporate bonds, including exposure to riskier high-yield bonds, such as Schroder Strategic Credit (GB00B11DP106), have also held up well, with modest losses.
High-yield corporate bonds are less sensitive to rate changes but have a greater risk of defaulting on their debt in challenging times. As such, a recession would hurt high-yield bond funds and strategic bond funds heavily exposed to this subsector. While not all flexible bond funds use all the tools available, those that do have tended to diversify widely.
Jupiter Strategic Bond (GB00B4T6SD53), the biggest name in the sector, has around 40 per cent in government bonds and a spread of exposures in terms of region and maturity. Janus Henderson Strategic Bond (GB0007533820) has more than half of its portfolio in government and investment-grade corporate bonds.
Turning to the investment trust space, various sectors have seen discounts widen amid the recent market turmoil. However, the handful of bond-focused trusts that exist have been popular following good performance in recent years, and their shares trade on premiums to net asset value (NAV). CQS New City High Yield (NCYF) is on a 7.2 per cent premium, with TwentyFour Select Monthly Income (SMIF), focused on more esoteric fixed income instruments, on 2.2 per cent and Invesco Bond Income Plus (BIPS) on 1.4 per cent. DB