Investors who fled to perceived safe havens after the Iran attacks have found little protection. Both government bonds and gold have failed to shelter portfolios: gold has pulled back sharply after its surge last year, while government bonds — traditionally the ballast in mixed-asset portfolios — have struggled since the Ukraine invasion and may need a recession to recover their defensive role.
Two clear consequences of the recent shock are visible: energy prices are higher, and neither bonds nor gold has behaved like a classic safe haven. Gold’s recent rout — its worst month in decades — helps illustrate why: last year’s parabolic rise likely priced in geopolitical and inflation risks and drew speculative flows, leaving many positions ripe for liquidation when investors sought cash.
Government bonds tell a different but related story. In a conventional flight-to-safety, capital rotates into sovereign debt, cushioning equity losses. This time, fears of an oil-driven inflation spike and of hawkish central-bank responses have pushed yields up instead. Markets are now pricing in higher policy rates and elevated inflation expectations, which erodes bond prices.
That dynamic leaves balanced portfolios exposed. Ulrike Hoffmann-Burchardi, UBS Global Wealth Management’s Americas chief investment officer and global head of equities, warns that a standard 60/40 equity-bond allocation is vulnerable to an inflation shock because both asset classes can fall together. She estimates a typical 60/40 portfolio is down roughly 3.5% this year and recommends expanding diversification into assets such as commodities that carry scarcity premia.
A longer historical lens raises doubts about relying on bonds during wartime. A recent Centre for Economic Policy Research (VoxEU) study looked at 300 years of government spending shocks — from major wars to the pandemic — and found that bonds frequently delivered substantial real losses during these episodes, sometimes underperforming equities and real estate.
The paper notes that wars tend to trigger large, sudden increases in government spending — roughly 7% of GDP per year on average in the first four years of conflict for the U.S. and Britain — and that this spending has rarely been financed entirely by higher taxes. As a result, bondholders have historically suffered: average real losses of about 14% over the first four years of crises, with cumulative bond returns about 20 percentage points below returns on stocks or property. Nominal bond returns were often positive, but inflation has eroded real returns, and governments have at times used inflationary measures or financial repression (for example, yield caps on Treasuries in World War II or suspensions of gold-standard rules) to reduce the real burden of war debt.
That history helps explain why bonds can perform well in recessions and financial crises — environments that typically prompt aggressive policy easing and falling yields — but poorly in episodes tied to large fiscal shocks.
The present backdrop is consistent with that pattern. Many hope the current conflict will be short, but modern wars can and do last: the Ukraine war has entered its fifth year with no clear end. Meanwhile, bond indices are showing the strain: ETFs tracking U.S. Treasuries and the Bloomberg Multiverse global government bond index fell about 2% in March, and both remain roughly 14% below their levels five years ago, not having recovered from the 2022 inflation and rate shock after Russia’s invasion.
Central-bank policy rates are settled above pre-pandemic norms in many economies, and another sustained inflation spike could push them higher again. Because the inflation and interest-rate shock four years ago did not trigger a recession in the U.S., rates and inflation expectations have stayed elevated, extending pressure on bondholders.
So will bonds need a recession to outperform again? Probably. A true, demand-driven downturn would likely force central banks to cut policy rates decisively, overwhelming price pressures and pushing yields down — the condition under which government bonds tend to shine. By contrast, an energy-driven inflation squeeze or prolonged war is more likely to keep yields high and bonds weak. In short, war often hurts bondholders; only a recession is likely to restore the conventional safety that investors expect from sovereign debt.
