Death, taxes and turmoil: is the age of the safe haven over?

This article was originally published in The Times on 4th February 2026. It explores changes in the global financial system and what they might mean for traditional safe havens. 

There are three things in life one can be sure of: death, taxes and financial crises. When the latter unfolds there is a flight to quality as investors seek out a safe haven. That desire for a safe haven is now reinforced by economic uncertainty arising from an imbalanced world economy and by the scale of geopolitical policy unpredictability in the US.

This year, though, financial stability risks look set to emerge and will do so in a climate where a safe haven no longer exists. Last year’s rise in Japanese government bond yields was a warning sign. Once seen as a safe haven, investors needed to be better rewarded.

Now, the questions marks concern government bonds and the dollar: both traditional safe havens. This should worry us. Although Britain is not an exception, its high debt and relentless upward trend in public spending are troubling.

The UK has a large risk premium built into its borrowing yields. A sharp fall in inflation and rate cuts from the Bank of England should reduce this premium. But the market is not convinced any fall in inflation can be sustained. Even if it is, low inflation might not permanently reduce the UK’s risk premium because of high debt.

While stronger economic growth is necessary to address that debt problem, it will not be sufficient. In the wake of the global financial crisis, UK productivity and economic growth slowed. But even if the UK had maintained its pre-2008 growth rate of 2.5 per cent, its level of debt would still have risen sharply to about 80 per cent of GDP. While lower than the current 95.5 per cent, it would have still been high.

Another challenge has been the policy to empower financial regulators. As has now been widely acknowledged, the regulatory pendulum has swung too far since the global financial crisis in the direction of oversight and control.

This has led to rapid growth in the shadow banking industry: the non-bank financial institutions. They now eclipse the banking sector in terms of assets held globally. This is away from regulatory scrutiny and is having a profound impact on government bond markets.

Andrew Bailey, the governor of the Bank, alluded to this in his recent testimony to the Commons Treasury select committee: “There has been a huge change in, frankly, the structure and nature of intermediation in government bond markets in the last five to ten years. They are now dominated by non-bank institutions, and hedge funds are a very big part of that.” Yet government bonds are seen as a global safe haven. How can that any longer be seen as a reasonable assumption?

After the global financial crisis, western countries relied upon the major central banks — which are non-commercial players — to buy public debt. Now, it’s shadow banks including leveraged and opaque hedge funds.

This makes it easier to sell debt, but at a risk. As was often asked before the global financial crisis, what happens when the music stops — that is, when leverage slows, as policy rates approach their floor? Does everyone rush for the exit at the same time? Risks in one part of the world may trigger contagion elsewhere.

One positive development merits attention. Last week saw the Bank’s seven-day short-term repo allotment exceed £100 billion for the first time. While sizeable, this signals a return to a more normal environment for easing market liquidity strains, with no stigma attached to its use.

Alongside government bonds, a major concern is the dollar. In a crisis, investors tend to buy dollars, helped by the depth and liquidity of its markets and confidence in the US. That safe-haven status is now being tested.

Less net new assets are being put into the US and dollar exposure is being hedged. The dollar continues to weaken. As this continues it may feed concerns about a fragmentation of the global financial system. There is constant talk of de-dollarisation. Yet there is no real alternative. This points to a shift to a multi-currency world.

In December the most active currencies for global payments were the dollar with 50.5 per cent, euro 21.9 per cent and sterling 6.7 per cent. The renminbi was sixth at 2.7 per cent. Excluding payments within the eurozone, the dollar’s share rises to 58.6 per cent and the euro falls to 13.7 per cent.

Last week it emerged that President Xi has called for the renminbi to become a reserve currency. That is understandable. It would entail promoting the renminbi’s internationalisation, boosting its use in trade and opening up financial markets in a gradual and orderly way. This takes time. It would be accelerated if China’s development of a reserve bank digital currency proves successful and it requires convertibility of its currency too.

The euro, in turn, would need to see its domestic bond market develop, requiring a move towards a central budget and political union.

While the dollar’s use in trade dominates, its share of global currency reserves has fallen steadily this century, from about 70 per cent to 57 per cent. In turn, this has fed the attraction of gold. But as we saw last week, speculative activity can have an effect on all precious metals. Commodity implosions are not uncommon, being seen in 1980, 2013 and 2020, along with a cyclical peak and turning point in 2013. The move to tokenisation and the take-up of crypto assets is potentially another profound development.

The plate tectonics of the global financial system are moving. This will undoubtedly trigger a few earthquakes as a new financial landscape unfolds. Uppermost is that the concept of a risk-free asset and a safe haven in the event of a crisis no longer exists.

Dr Gerard Lyons is chief economist at Netwealth