Why traditional safe havens are fading and what it means for real assets

A new market regime is emerging as investors respond to structural shocks reshaping risk perceptions around fiscal unsustainability, persistent inflation, escalating geopolitical conflict and increasingly mercurial trade policy shifts.

For most of the past three decades, portfolio construction was anchored to an environment characterised by globalisation, low inflation and relative geopolitical stability. That framework is now redundant.

Investors are now operating in an environment defined by sovereign-led protectionism, mediated through tariffs, policy incentives and a prioritisation of national resilience across energy, defence, strategic resources and artificial intelligence. These forces will shape the real asset investment landscape for the rest of the decade.

In early 2026, the abrupt escalation in Venezuela led by the January 3 capture of Nicolás Maduro by US forces, reinforced geopolitical risk.

The US Supreme Court has so far delayed a much-anticipated ruling on the legality of President Donald Trump’s sweeping “emergency” tariffs. Prediction markets imply around a 70% probability that the Supreme Court will rule against the Trump administration, which could trigger an immediate legal fight for an estimated $150 billion in refunds for duties already paid if Trump loses. The ruling will not capture impact levies on steel, aluminium, automobiles, copper products and lumber as they were implemented under separate legal powers. If Trump loses, it would weaken strategic flexibility for negotiating leverage but not permanently obstruct White House trade policy.

US Treasury Secretary Scott Bessent has indicated the administration could replace any lost revenues by switching to other tariff authorities.

The traditional role of long-dated government bonds and the US dollar as portfolio shock absorbers is deteriorating. To understand why, one must look back to March 2023, when long-term US Treasury yields rose after the Federal Reserve signalled its first rate cut, a reversal of the historical pattern in which yields typically fall as policy rates are reduced. But the market response to Liberation Day in April 2025 is even more instructive. The announcement of sweeping new tariffs triggered a $6.6 trillion global market loss over 48 hours. Critically, this event exposed the vulnerability of the 60% in stocks, 40% in bonds default portfolio model.

The S&P 500 lost $5.8 trillion in value over four days, the steepest loss since the index’s inception. Long-term yields spiked and the dollar weakened, proving that the US dollar is no longer a guaranteed shock absorber for tariff-driven shocks. In September, the Bank for International Settlements reported $10 trillion in average daily foreign-exchange market turnover during April, reflecting intense dollar selling and signalling a loss of safe-haven reliability during acute stress windows.

This event could prove to be a dress rehearsal for upcoming volatility windows in 2026, where market events – whether catalysed by geopolitics or unforeseen market shifts – cause a rapid synchronised sell-off in equities and traditional safe havens. Liberation Day can be viewed as a global stress test for diversification.

But in the immediate aftermath, markets soon stabilised. The S&P 500 fully recovered and ended the year breaking all-time highs, supported by enthusiasm around AI which drove record equity concentration, and delayed data releases that supported three 25 basis point cuts between September and December.

In the early part of the fourth quarter of 2025, Trump reignited global trade tensions by threatening to impose 100% tariffs on all Chinese imports. It was a second volatility spike within six months. Trump’s announcement was in response to its export controls on rare earths. It reflected China’s most powerful leverage, curbing supply of strategic materials vital to technological development in the US that would hurt advanced manufacturing and defence industries like semiconductors, robotics and jets. Chinese officials framed its actions as retaliation for the US Department of Commerce’s decision to blacklist their country's companies from acquiring advanced US technology in September.

The S&P 500 fell 2.7% and the Nasdaq plunged 3.6%, their worst single-day drops since Liberation Day. Notably, the dollar sold off, contrary to its usual safe-haven role, attributed to the domestic inflationary impulse of tariffs and headwind to US consumer spending. Investors fled to the perceived safety of short-dated and 10-year Treasuries, a more traditional reaction. Gold also rallied, reflecting central-bank buying, real-rate dynamic and declining confidence in the dollar’s role as a universal hedge.

What matters in these episodes is how quickly it exposed vulnerabilities in long-standing portfolio diversification assumptions in a post-globalisation environment – and how vulnerable traditional portfolios allocations are for repeat occurrences in 2026 and beyond.

The Trump-Xi meeting at the Asia-Pacific Economic Cooperation summit in South Korea in late October led to the leaders agreeing to a one-year trade truce. Trump lowered China tariffs to around 47% and paused new ones, while China delayed its imposition of new rare-earth export restrictions and resumed US soybean purchases. It was a pause, not permanent resolution.

However, subsequent to the de-escalation, while the Fed was cutting rates in Q4, pushing down shorter dates yields, the long-end continued to steepen. This curve “bear steepening” reflects refinancing concentration risk, re-inflation risks, low confidence in federal debt management and the independence of the Fed. Strong US economic data is also pushing yields up. If the US economy remains resilient and avoids a recession, the Fed will not need to keep cutting rates, meaning the yield floor for the 30-year gilts is much higher than previously thought.

The more important test still lies ahead: how long-dated bonds respond to renewed volatility that endures for longer periods will be telling. A dollar recovery under those conditions would further underline how conditional traditional diversification relationships have become.

As the long-end of the yield curve steepens, a deeper structural shift is occurring: capital is being redirected towards real-economy assets that serve strategic national functions – from energy infrastructure and logistics to data centres, defence facilitie and industrial platforms. While policy mechanisms vary across jurisdictions, the cumulative effect is the creation of durable tailwinds for real-asset demand aligned to sovereign priorities.

Long-dated government bonds are facing structurally weaker demand as fiscal concerns mount, deficits expand and the traditional buyer base contracts across the globe. In the US specifically, as of January 6, 2026, gross national debt was $38.43 trillion, projected to reach $39 trillion by early April.

This has led to a “bill-heavy” strategy where the Treasury issues short-dated debt to avoid locking in high long-term yields. However, this strategy is kicking the can down the road to a time when it hopes the long-end finally softens. Avoiding issuance at the long end creates a long bond demand vacuum, pushing yields higher, heightening fiscal concerns over sovereign debt management strategy, and creating a self-fulfilling prophecy in which the “softening” never happens. In the meantime, the Treasury is effectively in a permanent state of refinancing risk, needing to roll over approximately $9 trillion each year, or one-third of its outstanding debt.

The One Big Beautiful Bill Act, signed into law in July 2025, has complicated this picture. While the Act made popular tax cuts permanent, it is projected to add $3.4 trillion to the primary deficit over the next decade, which climbs to $4.1 trillion when additional interest expense is factored in. These dynamics further the bear steepening and elevate sovereign funding risk. At the same time, foreign ownership of marketable US Treasuries has fallen from nearly 50% in 2008 to approximately 30% in early 2026, as China, Japan and others reduce exposure amid geopolitical tension and rising currency hedging costs.

The Fed has begun the transition from quantitative tightening to a reserve management regime characterised by a technical expansion of its balance sheet by approximately $45 billion per month starting in January 2026. This regime should not be conflated with quantitative easing and is not intended to manipulate shorter-dated borrowing costs. Rather, policy aims to maintain "ample" reserves and insulate the financial system from potential liquidity volatility, such as geopolitical events, trade war escalation, and the aftermath of recent US government shutdowns.

The Fed is creating a liquidity buffer and pre-emptively increasing bank reserves to support money market stability. This monetary policy reflects pragmatic forward-planning but also has a “crowding” effect that increases demand at the shorter-end. The Fed is specifically buying short-dated T-bills, competing with private investors for the safest, shortest debt. This displaces capital that might otherwise sit in bills, potentially forcing yield-sensitive private investors to park capital in 10-year-dated maturities when they need to park capital safely.

Several other factors are also shrinking the number of buyers for long-term government bonds. Basel III banking rules now require large banks to hold more safety cash, making it more expensive for them to hold long-term debt. At the same time, pension funds are avoiding these bonds because they do not want to be locked into long-term investments while interest rates are so volatile. This has also contributed to the US Treasury’s shift to selling more short-term T-bills rather than long-term bonds to keep long-term interest rates from spiking and to manage a national interest bill that has now climbed above $1 trillion a year.

Absent credible fiscal reform, pressure on long-dated government bonds is likely to intensify. In some jurisdictions, this may prompt renewed discussion of yield-curve-control (YCC) policies similar to those formerly employed in Japan, where central banks cap long-term borrowing costs to artificially anchor markets. Such measures would suppress volatility but do little to resolve underlying fiscal strain and could trigger significant currency devaluation.

In the UK, long-dated gilts reached multi-decade yield highs of 5.7% in September, marking levels not seen since 1998, driven by fading institutional demand and the residual liquidity drain of the Bank of England’s (BoE) recently concluded quantitative-tightening programme. Defined-benefit pension schemes have largely completed duration-matching requirements and are transitioning toward lower-duration profiles, reducing a key source of structural demand. Similar dynamics are evident in France following the budgetary gridlock and credit downgrades of 2025 and Japan, where the Bank of Japan’s (BoJ) transition to a 0.75% policy rate in December 2025 has further weakened appetite for long-dated US sovereign debt.

This shift is not simply cyclical. Capital retreating from duration risk is increasingly seeking assets that sit on the right side of fiscal constraint and policy direction. Real assets and private credit are well positioned to absorb these redirected flows, offering income durability, inflation linkage, and insulation from the structural volatility of this new interest-rate cycle.

Across major economies, policy is now acting as a direct allocator of capital. Governments are actively directing domestic capital to invest in domestic manufacturing, energy, digital infrastructure, supply of strategic resources and defence capacity. Sovereign industrial strategies, pension reform, tariffs, export controls, and defence spending are mobilising private capital into assets that underpin energy security, supply-chain independence, and production of strategically important assets and products. It is a deliberate, if uneven and often inefficient, strategy which will underpin relative demand between real assets.

• United States: Executive orders have expanded access to alternatives within pension plans and accelerated permitting for AI data centres via fast-track federal designations. Energy capacity is the limiting factor in AI deployment, reordering value towards energy-linked real estate, grid-connected assets, and interconnection platforms. Federal equity stakes in US semiconductor, rare-earth, critical-mineral, and lithium companies are effectively de-risking private investment.
• Tariffs as a Mechanism: The federal government is effectively using tariffs to tax foreign consumption and using those receipts (plus tax credits) to subsidise domestic production. Headline tariff receipts have risen to almost US$30 billion per month, equivalent to an annualised run rate above US$350 billion, compared with around US$81.5 billion in 2024. This revenue is volatile and is at risk of an imminent Supreme Court ruling. Longer term, international trade routes may adjust even if alternative laws are implemented to reinstate Supreme Court blocked tariffs. The strategic value of tariffs lies less in deficit reduction and more in their role as a capital-redirection mechanism.
• United Kingdom: Government policy is directing capital towards clean energy, manufacturing, advanced technologies, supply-chain resilience and social infrastructure. Great British Energy (GBE) has been established with an initial £8.3 billion in funding via the 2025 Spending Review. The Pensions Scheme Act 2025 now supports the mobilisation of domestic capital into “productive assets” like infrastructure and real estate. The UK’s updated 10-Year Infrastructure Strategy commits £725 billion in public funding to energy, transport, and digital infrastructure, centralised under the National Infrastructure and Service Transformation Authority (NISTA).
• European Union: Europe is entering a new fiscal-stimulus cycle distinct from the post-Covid phase. Across the EU, private capital is being mobilised through the €800 billion Defence Readiness Omnibus (established under the ReArm Europe Plan/Readiness 2030), Germany’s €500 billion Infrastructure and Energy Fund, and REPowerEU’s €300 billion initiative.

Capital deployment into defence and strategic transport corridors is anchoring long-duration public–private leasing structures across Germany, France, Italy, Eastern Europe, and the UK. Government-backed tenancy and procurement-linked occupancy are creating inflation-linked, bond-like income streams that appeal to institutional investors seeking defensible risk-adjusted exposure.

Europe has moved towards a sustained commitment to defence funding, embedded in EU and national policy. As defence expenditure scales, sovereign demand for specialist logistics hubs, manufacturing facilities, and secure data infrastructure will intensify. Sector prioritisation will increasingly reflect strategic function rather than cyclical growth expectations.

The traditional diversification paradigm, built on historical asset-class correlations, is giving way to a new framework anchored in economic functions and resilience. Select real assets are evolving from alternative allocations into structurally resilient ‘core’ anchors that can benefit from macroeconomic shocks, policy interventions, and supply-chain disruptions. The next phase of institutional portfolio construction will be defined not by incremental adjustments, but by a structural reallocation towards real assets over the remainder of the decade and beyond.

James Wallace is an independent financial journalist and strategic writer for global asset managers and advisory firms, focused on real assets, macro, risk regimes, refinancing, and portfolio construction. For more updates, subscribe to his free Substack here.