Investors seeking shelter from the Iran conflict have found themselves exposed instead. Both government bonds and gold have failed to protect portfolios. Gold, which surged last year, had an arguable excuse for falling back; bonds, however, have struggled since the Ukraine invasion and may require a recession to regain their traditional role.
Since the initial attacks on February 28, two clear effects have emerged: energy prices are notably higher, and neither bonds nor gold has behaved as a safe haven.
Gold’s worst month in 43 years highlights the puzzle. Long seen as a refuge in global stress and a hedge against inflation, gold has so far been neither. The simplest explanation is that last year’s parabolic rise had already priced in geopolitical and inflation risks and then attracted speculative flows. Now some of those positions are being liquidated to meet liquidity needs.
Government bonds tell a different story. They are the backbone of conservative fixed-income funds and the ballast in mixed-asset portfolios, typically cushioning equity losses. In a conventional flight-to-safety, money would rotate into government bonds. That hasn’t happened this time.
The prospect of an oil-driven inflation surge, combined with the prospect of hawkish central-bank responses to counter it, has pushed yields higher. Markets are pricing in both higher base interest rates and elevated inflation expectations, undermining bond prices.
Ulrike Hoffmann-Burchardi, UBS Global Wealth Management’s Americas chief investment officer and global head of equities, warns that a 60/40 equity-bond portfolio is vulnerable to an inflation shock: in such a scenario, both equities and bonds can fall. She estimates a typical 60/40 portfolio is down about 3.5% this year and suggests diversifying further into commodities that carry scarcity premia.
A longer historical perspective raises the question of whether bonds should ever be relied on during wars. A recent Centre for Economic Policy Research (VoxEU) paper examined 300 years of government spending shocks—from major wars to the COVID-19 pandemic—and found that government bonds often produced substantial real losses during these episodes, even underperforming equities and real estate.
Historically, wars have triggered large, sudden increases in U.S. and British government spending—averaging roughly 7% of GDP per year over the first four years of conflict. That spending has seldom been financed solely through higher taxes.
“Wars are always disaster times for bondholders,” the paper concluded. On average, bondholders incurred real losses of about 14% during the first four years of crises, with cumulative bond returns roughly 20% below those of stocks or real estate. By contrast, bonds tend to outperform during recessions and financial crises.
Nominal returns during wartime were often positive, but inflation erodes real returns—and governments have historically used inflation deliberately to reduce the real burden of war debt. Both the United States and Britain suspended variations of the gold standard during wartime for this reason. Financial repression—such as yield caps on Treasuries in World War II or policies that locked in creditors—exacerbated bondholder losses and helped reduce debt-to-GDP ratios after conflicts.
The paper notes that government bonds still provide insurance against many types of economic downturns, including recessions and financial crises, but they perform poorly in scenarios tied to large fiscal shocks.
Many investors are hoping any current conflict will be measured in weeks, not months. Modern wars can be short, but the Ukraine war is now entering its fifth year with no clear end. Meanwhile, government bonds are already showing weakness: ETFs tracking Treasuries and the Bloomberg Multiverse global government bond index were down about 2% in March, and neither index has recovered from the inflation and interest-rate shock following Russia’s 2022 invasion. Both remain roughly 14% lower over five years.
Central-bank policy rates have settled at levels above the pre-pandemic norm, and another sustained bout of inflation could push them back up. In the United States, the inflation and rate shock four years ago did not trigger a recession—meaning inflation and Fed policy have stayed at higher levels than before the pandemic, prolonging pain for bondholders.
The key question is whether bonds need a recession to genuinely outperform again. Only a recession would likely force central banks to cut rates decisively, as collapsing demand would overwhelm price pressures. An energy squeeze and cost-of-living shock could eventually produce that outcome, but war by itself is unlikely to help bonds recover—in many cases it does the opposite.
