Tariff-induced volatility caused trillions of dollars in stock market losses over the course of a few days in April. But, despite the metaphorical sea of red, there were still positive returns to be gleaned. As investors adopt a risk-off approach in the face of uncertainty, understanding allocation to safe haven assets, such as government and high-quality bonds, is crucial for mitigating sharp losses and diversifying portfolio equity exposures. 

Bonds for risk reduction

Risk is generally measured through portfolio volatility and can be significantly impacted by asset allocation. While there can be an infinite number of asset combinations in a portfolio, two of the main considerations are the weights of stocks and bonds. Generally, a portfolio more heavily weighted towards stocks will experience higher volatility, whereas increasing the weight of bonds in a portfolio tends to reduce volatility.

Market volatility overview

President Trump ordered tariffs on goods from Mexico, Canada and China to take effect on February 4, followed by multiple tariff negotiation pauses. These events left stock markets rattled as investors scrambled to predict global market and economic implications. 

As illustrated below, the US S&P 500 index exhibited significant declines since the tariffs took effect and were subsequently paused for negotiations. Losses in the US were particularly pronounced, given the impact of proposed tariffs on the technology sector. In contrast, the performance of short-term Canadian government/investment grade corporate bonds (represented by the FTSE Canada Short-Term Bond Index) showed greater resilience during sharper equity sell-off periods. Let’s explore why. 

Closing price performance S&P 500 versus FTSE Canada Short-Term Bond Index
(January 1, 2025 - April 28, 2025)

What are safe haven assets?

Government and high-investment grade bonds, consumer staples, utilities and gold are all examples of safe haven assets. These assets tend to retain or increase in value during periods of market uncertainty or economic downturns, and provide a greater sense of security for investors seeking to preserve capital and limit losses. 

For example, consumer staples and utilities are safe haven investments (also known as defensive investments), since, regardless of economic and market conditions, individuals require access to basic necessities such as food, water, heating and electricity. That’s not to say these investments will always go up. The point is that when a product or service is a necessity, the demand is more stable than non-essential products or services.

The shifting Canadian government yield curve

Since the beginning of 2025, the Canadian government yield curve has noticeably shifted. The yield curve is a graphical representation of interest rates on debt, over a range of maturities, for borrowers, including governments or corporations. Short-term rates have dropped sharply below long-term rates due to worries of a tariff-induced protracted economic slowdown and rekindled inflation pressures. As a result of these worries, many investors have sought the safety of shorter-term government and high-quality corporate bonds.

From the chart below, which illustrates the Canadian government yield curve between January and April 2025, we can take away two key points: 

• Investors holding high-quality, short-term bonds, benefited from bond price appreciation during a declining short-term interest rate period.
  
  
• Rising-longer term bond rates now present a further opportunity for investors to lock in higher returns for longer investment periods.