Federal Reserve FEDS Notes·Oct 16, 2026, 2:15 PM ET

Government Bonds’ Safe-Haven Property and Inflationary Pressures

Recent Middle East conflict escalation caused sharp stock declines & rising energy prices, while long-term government bond prices in major advanced economies also fell, challenging the view that bonds always act as safe havens.
The hedging property of government bonds depends critically on the type of economic shock & the stability of inflation expectations rather than being a fixed characteristic.
When inflation is near target & expectations are anchored, central banks can ease policy during shocks, allowing bonds to rally as stocks fall; conversely, above-target inflation forces tighter policy to stabilize expectations, causing stocks & bonds to fall together.
Historical analysis of three periods reveals distinct stock-bond correlation patterns: negative correlations in the pre-2000 era as inflation stabilized, strongly positive correlations from 2000–2021 during the low-inflation era, & a return to negative correlations post-2021 due to persistent inflationary pressures.
Post-2021 data shows significantly higher sensitivity of bond yields to inflation news compared to the 2000–2019 period, with U.S. inflation news driving global yield increases & causing stock returns to fall on own-country inflation surprises.
Adverse supply shocks occurring amid above-target inflation lead investors to expect tighter monetary policy, which breaks traditional flight-to-quality dynamics & deteriorates the safe-haven status of government bonds.
The deterioration in bond hedging properties observed since 2021 reflects a shift in the macroeconomic environment regarding inflationary pressures & shock types rather than a fundamental change in bond characteristics.