When the US and UK Treasury markets sold off in response to Trump’s tariffs, many investors expressed fears about their safe-haven status. Shouldn’t a safe-haven asset hold its own in volatile and uncertain times?
Some of the possible reasons for this sell-off included hedge funds liquidating holdings in an effort to raise cash, global investors doubting the stability of the US economy, fears of rising inflation and lower growth, and the possibility of more government borrowing in the future, according to Goldman Sachs.
This recent episode has led many investors to ask: Are bonds a good investment?
We will answer that question by first considering the reasons investors include bonds in their portfolios. After that, we will narrow down on the April episode and what it means for investing in government bonds, four months later. We’ll cover:
- Are government bonds a good investment? Why investors choose them
- Are government bonds still a good investment? The current state of Treasury securities
- How asset owners should approach government bonds
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1. Are government bonds a good investment? Why investors choose them
Before considering whether government bonds are still a good investment, it is appropriate to examine why investors love them in the first instance.
There are at least six reasons:
Capital preservation
Government bonds are generally considered low-risk investments (especially when compared to corporate bonds and equities), since they are backed by the creditworthiness of the federal government.
The interest rate on government bonds is often designated as the “risk-free interest rate,” reflecting the belief that there is little to no risk of default. Though many countries have defaulted in times past (not making coupon payments or repaying the principal at the bond’s maturity), they happen infrequently, especially among developed nations.
Thus, investors are assured of repayments at the maturity date.
Steady income
Given the lower risk of default, investors seeking a steady income have found the consistent interest payments (coupons) of government bonds to be useful. The fixed rate of interest also means that investors receive a guaranteed amount.
For example, pension funds match their future payment obligations to the predictable nature of the cash flows from government bonds. Retirees with individual retirement accounts also increase their allocation to government bonds as they approach retirement.
Safe-haven asset
A safe haven asset is an asset that can retain or increase its value during periods of economic stress and uncertainty.
US government bonds have been traditionally viewed by global investors as such an asset. This is due to their liquidity, stable demand, low correlation with risky assets like stocks, and the global faith in the US economy and government.
The factors that determine whether the Treasury bond of a developed economy can serve as a safe haven include the country’s political risk rating (the quality of its institutions), the size of its debt market, and whether its bonds have played that role in the past, according to the European Central Bank.
For emerging markets, real GDP, external sustainability, and whether the bonds have played such a role in the past are the crucial factors.
An academic survey of the performance of gold and the Treasury bonds of the US, Japan, Germany, and Switzerland during the past five pandemics declared by the World Health Organisation (up to the COVID-19 pandemic) provides a recent insight into the safe-haven status of government bonds.
The researchers found that US bonds provided the best safe haven for both the S&P 500 and the MSCI Emerging Markets Index. It was followed by Japanese bonds. Though not as valuable as US and Japanese bonds, German and Swiss sovereign bonds also have safe-haven properties.
On the other hand, they concluded that “Gold is a weak safe haven for stock market investors during all the epidemics.”
Portfolio diversification
When two different types of investment have a low positive correlation or negative correlation, combining them in a portfolio can reduce the portfolio’s overall risk.
As the chart below shows, the rolling 3-year correlation between US equities and bonds has been in negative territory since 2002.
Equity-bond Correlation in the US, 1972-2025
Source: Barclays
Similarly, correlation was falling until the 2021-2022 inflationary episode that succeeded the COVID-19 pandemic. Yet, while the 3-year correlation has increased, it is still in negative territory.
Also, the 10-year rolling correlation has remained below 0.25 for most of the 2000s, until the 2021-2022 inflationary episode. Nevertheless, since 2023, the correlation has been trending back to the below-0.25 territory.
“Since the turn of the century, negative equity-bond correlations survived several macro and bear-market regimes,” according to Barclays. “A negative equity-bond correlation implies that bonds can bring balance to a portfolio, by mitigating the effects of equity drawdowns.”
However, they cautioned that high inflationary periods may unsettle this relationship and make bonds less useful as a diversification tool. Stocks generally fall in these periods, but so do bonds. As interest rates rise in response to inflation, bond value falls (this is known as inflation risk).
The same conclusion holds when looking at the Japanese and European Union markets, according to State Street Global Advisors (SSGA), an investment management firm.
Tax benefits
Tax rules also favour government bonds in many jurisdictions.
In the US, bond coupons are exempt from state and local income taxes. Also, there is no capital gains tax on a Treasury bond held till maturity (unlike other types of bonds).
Similarly, the UK exempts capital gains on gilts from tax. Income from gilts is also tax-free if they are held in tax-efficient wrappers like an Individual Savings Account (ISA) or a Self-Invested Personal Pension (SIPP) account.
Such tax advantages abound in other countries. Investors seeking tax-efficient portfolios may embrace government bonds for that reason.
Hedging against interest rate risk
When interest rates are high, the equity market suffers since higher rates constrain consumer and business investment.
In a high-interest rate environment, investors can purchase bonds and receive high coupon payments. If interest rates fall in the future, bond prices rise, since the old bonds pay more interest than the new bonds.
The higher-yield bond can then be sold in the secondary market, with its capital gains compensating for the loss on the equity portion of the portfolio.
So, are bonds a good investment? Yes, they are. And government bonds are especially a good investment due to their low default risk and their implication for capital preservation, income stability, downside protection, portfolio diversification, and interest rate risk hedging.
2. Are government bonds still a good investment? The current state of Treasury securities
Are US government bonds a good investment?
In the aftermath of the sell-off in the Treasury market following Liberation Day, Goldman Sachs pointed to three reasons bondholders were worried about the safe-haven status of US government bonds.
First, the expectation of higher inflation (due to the tariffs) meant that the correlation between equities and government bonds would increase (as seen above), causing the latter to lose some of its safe-haven status and diversification benefit.
Second, some worried that the negative growth impact of the tariffs could lead to more government borrowing, which means a further fall in the price of US Treasuries.
Third, there was a worry that foreign investors are dropping US Treasuries due to uncertainty about the fiscal stability of the United States.
So, what’s the current state of these fears of economic downturn, inflation, and foreign dumping?
Economic downturn
Let’s start with the economic downturn.
In May 2025, J.P. Morgan reduced the probability of a US and global recession from 60% to 40%. “The recent de-escalation of trade tensions will likely reduce the risk of a U.S. and global recession this year,” they said.
Though they expect growth to be subpar, they believe that recession risks have faded.
Also, the US GDP grew by 3% (annualised) in Q2, 2025, as reported by US Bank, a financial institution.
US Annualised GDP Growth, 3Q 2021 - 2Q 2025
Source: US Bank
More importantly, they expect growth to remain positive for the rest of the year. “Consensus expectations are for GDP growth to slow but remain modestly positive into year-end,” according to Rob Haworth, a senior investment strategy director.
Inflation
Consumer Price Index (CPI) data for June 2025 showed that inflation in the US was at 2.7%, a 30-basis-point increase from the 2.4% figure in May 2025.
The Fed has expressed worry about rising inflation resulting from the tariffs, and this has been a significant consideration in its reluctance to cut rates.
Though one can be confident of the Fed’s ability to keep inflation in check, who knows if political pressure from Trump will lead them to cut interest rates prematurely?
Foreign dumping of US Treasuries
In April, Goldman Sachs noted that while foreign investors were selling off US Treasuries, foreign central banks were not. “But there isn’t a lot of evidence to suggest that there was active selling from the foreign official sector — the central banks that might be relatively sensitive to these shifting political tides.”
Yet, they note that diversification away from dollar assets remains a reasonable concern.
While also admitting the recent concerns, SSGA is even more confident that the structural advantages of the US (and its currency) will continue to play in its favour.
“We see no meaningful shift in the safe-haven status of US Treasuries over the medium term, despite heightened concerns around credit quality following the recent Moody’s downgrade,” they noted. “The US Treasury market remains unmatched in terms of depth and liquidity, and the US dollar continues to dominate global finance—serving as the primary currency for commodities pricing, international trade, and official FX reserves.”
Furthermore, while admitting the shaking of confidence in US assets, they affirmed that the flow data and price action do not suggest a ‘dumping’ or significant shift in foreign ownership patterns.
Also, though they admit that fiscal irresponsibility represents a tail risk for the long end of the Treasury curve, they don’t see this as the base case.
They thus conclude: “We take the threat of US fiscal irresponsibility seriously, but we expect longer-term structural forces (including foreign demand) to reassert themselves in the near term, albeit against a structural backdrop of potentially fading US asset dominance.”
Are UK government bonds a good investment?
In addition to the contagion effect from the sell-off in the US Treasury market, concerns about rising government debt and fiscal sustainability have also contributed to the rising prices and falling yields of UK gilt, according to CBRE Investment Management.
Also, while the supply of debt is rising, demand is not catching up. This is partly due to the fall in demand for gilts by pension funds and insurance companies (from purchasing an average of 65% of all gilts between 1998 and 2008 to a meagre 22% in 2024).
Share of the Demand for UK Gilts, 2008-2024
Source: CBRE Investment Management
Another factor is a rise in foreign ownership. Foreign investors hold a third of UK gilts, which adds to their volatility (they can buy government bonds as fast as they can sell them). “Compared to U.K. institutions and banks, foreign buyers are less likely to be stable holders of U.K. debt, especially during times of distress.”
While acknowledging the sell-off in the UK market in April, AJ Bell, an investment platform, noted that it wasn’t as dramatic as what happened in the Liz Truss era.
Also, CBRE projects that GDP growth in the UK will gain momentum in 2025 and 2026, with interest rates also falling. These will lead to a rise in tax revenue, a decline in government deficit, and a possible fall in the debt-to-GDP ratio (if the growth rate exceeds the interest rate).
How will this impact the UK gilt market? “This level of growth should dampen fiscal sustainability concerns and, in turn, feed into lower bond yields,” they noted.
Perhaps we are already seeing a sign of this.
As the chart below shows, the yield on the 10-year gilt has stayed below the April peak and is currently on a downward trend.
U.K. 10-Year Gilt Yield
Source: Market Watch
Are global bonds a good investment?
What about markets outside the US and the UK?
In April, Goldman Sachs noted that the concern in G10 countries outside of the US was the downside risk of growth rather than inflation. Since it is inflation that reduces the value of government bonds as a safe-haven asset, they expected that Treasury bonds in ex-US developed markets will have a stronger case as a volatility hedge.
They also noted that rising debts in these countries would lead to a higher supply of government bonds. As we saw in the case of the UK, if this higher supply is not matched by sufficient demand (and a general fiscal sustainability), yields can increase.
However, if this rising supply coincides with falling demand for US Treasuries, then yields in the government bond markets in these countries should remain stable, even as they keep providing a hedge against market fluctuations.
“Uneven economic growth and inflation across countries and regions present opportunities for global bond investors,” according to RBC Global Asset Management, a Canadian investment management company.
They showed how a hedged global bond portfolio (FTSE World Government Bond Index (CAD Hedged) is less volatile and provides more diversification benefits than an exclusive focus on Canadian bonds.
But this is not only a Canadian affair. The same dynamic operates in the US, according to Alliance Bernstein, a global investment management company. As the chart below shows, global bonds (Bloomberg Global Aggregate Index USD Hedged) have been less volatile than US bonds over the past 30 years:
Volatility of Hedged Global Bonds vs Unhedged Global Bonds vs US Bonds, 1994-2025
Source: Alliance Bernstein
Similarly, while they capture 85% of the returns of US bonds, they only capture 65% of their losses, making them a good diversification tool:
Global Bonds Diversifying the Risks of US Bonds
Source: Alliance Bernstein
(Note: Past performance does not guarantee future performance)
3. How asset owners should approach government bonds
So, are government bonds a good investment?
We have seen that they serve important functions in the portfolios of both institutional and retail investors.
Yet, given current macroeconomic conditions, asset owners need to be strategic about them.
From everything we have said so far, we can point to these three strategies that asset owners should embrace:
Long-term focus
As SSGA has emphasised, though the US market may be facing uncertainty, its role (and the role of the dollar) in the global economy cannot be overlooked. Structural factors that support long-term demand should be prioritised over short-term volatility.
“Difficult as it may be, it still pays to keep an eye on the long-term horizon and try to ignore the fuzzy ball of confusion on the track in front of us,” said AJ Bell. “Markets regularly endure sell-offs like this, but still manage to rise in the long run.”
CBRE Investment Management made the same point about the UK. If growth picks up momentum and exceeds the interest rate, then the fears surrounding fiscal unsustainability may abate.
However, there are two more issues with regard to the UK.
First is its correlation to the US Treasury market. This can be a good thing, given the structural factors supporting the US Treasury market in the long term.
Second is the rise in foreign demand and the fall in demand by pension funds and insurance companies. This adds an extra layer of volatility to the UK Treasury market that asset owners should be aware of. But this may not be a big problem if supply normalises due to fiscal sustainability.
Diversification
We have also seen that global bonds can help to reduce volatility and enhance diversification.
Thus, asset owners should add global government bond funds (especially exchange-traded funds [ETFs]) with multiple issuers instead of focusing only on the US and the UK.
For one, we have seen a study showing that Japanese bonds were the second-best hedge during the last five pandemics, even as German and Swiss bonds also showed safe-haven characteristics.
Are global government bond ETFs a good investment? Yes, they are. Ex-US developed and emerging market bonds can provide safe haven and diversification benefits even at lower volatility.
Keeping an eye on inflation and growth dynamics
RBC Global Asset Management noted above that uneven growth and inflation dynamics provide opportunities for global investors.
“Working in a global bond universe and understanding the global monetary policy landscape both enable active bond managers to take advantage of investment opportunities that can provide downside protection with the potential for some capital appreciation.”
Goldman Sachs already showed how this works when they projected that the expectation of lower growth in G10 countries but lower growth and higher inflation in the US favours the safe-haven status of the former over the latter.
This kind of analysis can help asset owners unearth opportunities to reduce risk and increase returns.
Fortunately, you don’t have to do this analysis on your own. You can benefit from the insights of other asset owners and managers who are interested in the global bonds industry.
This is what we provide at the cio investment club – an association of financial experts sharing ideas about the global financial market. With this mutual information sharing, you can discover better investment opportunities and provide more value to your investors.
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Takeaways
- Despite recent volatility in US and UK bond markets, government bonds continue to offer benefits like capital preservation, steady income, and portfolio diversification.
- The long-standing role of government bonds as safe-haven assets hasn’t disappeared, especially when viewed from a long-term perspective.
- Global bond ETFs reduce portfolio volatility and provide downside protection, making them a strategic complement to US or UK holdings.
- Investors should focus on long-term fundamentals, monitor inflation-growth dynamics, and diversify across geographies.
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