What safe haven after the April US tariff announcement? Implications for euro area financial stability

Prepared by Paolo Alberto Baudino, Magdalena Grothe, Maurizio Michael Habib, Ana-Simona Manu, Peter McQuade, Martino Ricci, Emilio Siciliano, Toma Tomov, Luca Tondo and Gibran Watfe

Published as part of the Financial Stability Review, November 2025.

Trade turmoil in April 2025 saw a marked change in cross-asset behaviour compared with typical patterns. Notably, the US dollar depreciated strongly while US Treasury yields rose – the opposite of what usually happens in a risk-off environment. This prompted discussions as to whether the safe-haven properties of US dollar-denominated assets might be changing. This is particularly important for euro area financial stability since euro area investors hold US dollar-denominated securities in an amount equivalent to €6 trillion, which represents a significant share of their portfolios. As policy uncertainty remains high and alternative safe assets are scarce, investors’ risk management practices may be evolving. Immediate and decisive implementation of policies associated with the savings and investments union and the capital markets union would help foster an alternative market of safe assets for euro area and global investors.

The market turmoil in early April triggered a marked change in typical cross-asset behaviour in a risk-off environment. There was a spike in the VIX index, which captures market expectations for near-term US equity market volatility and is often considered to be a proxy for global investor risk sentiment. The index rose to a level exceeded only during the global financial crisis and the COVID-19 pandemic. Equity prices declined sharply at the same time as a broad-based depreciation of the US dollar. The US dollar is typically seen as a safe-haven currency as it has generally appreciated in a risk-off environment, such as during the global financial crisis (Chart A.1, panel a). The depreciation seen in April 2025 occurred despite a similarly atypical rise in long-term US Treasury yields – something generally associated with an appreciation of the US dollar. According to standard economic theory, tariffs should be partially offset by currency appreciation in the country imposing the tariffs. Moreover, a widening yield differential compared with euro area sovereign bonds (as Treasury yields increased while Bund yields declined) should also be associated with an appreciation of the US dollar. The movement observed was therefore a notable deviation. The response of US financial variables in early April was different from typical patterns seen during other risk-off episodes (Chart A.1, panel b). This special feature reviews recent patterns in risk behaviour in global financial markets and outlines implications for euro area financial stability.

1 Risk behaviour deviated from past patterns in April

In recent decades US Treasury securities and the US dollar have typically been regarded as safe havens during risk-off episodes. This privileged status reflects the significant strengths that have long been associated with the United States. These include deep and liquid financial markets; the dominant role of the US dollar in international trade and finance, including its role as a reserve currency; the credibility of the US Federal Reserve System; stable governance and political institutions; and strong legal protections for investors. This meant that, historically, whenever financial market risk was elevated, US Treasuries and the US dollar were perceived as relatively safe, causing demand for such assets to increase and their relative prices to rise, forming hedges in global investors’ portfolios against market risk.

Chart A.1

The April risk-off event was exceptional and sparked US dollar depreciation

a) VIX index and EUR/USD exchange rate during selected major risk-off events	b) Asset price responses to major risk-off events
(left graph: 7 Mar.-26 Dec. 2008, right graph: 1 Jan.-14 Nov. 2025; index, exchange rate)	(cumulative percentage changes)

While the tariff announcement was the trigger for the early April financial market events, there was a more general spike in policy uncertainty across multiple domains. Economic policy uncertainty also spiked, reacting not just to tariffs but also to a variety of other aspects of the US Government’s policy programme (e.g. fiscal, regulatory and immigration policies). However, the US tariff announcement sparked market stress, as the rates threatened on 2 April were much higher than had previously been expected. The tariff announcement increased the risk of a global trade war, particularly as China promptly announced its intention to retaliate.^[1]

What happened to key financial asset prices and correlations?

Some financial market proxies for investor appetite for US assets declined in April. The yield on ten-year US Treasuries surged by almost 50 basis points between 4 and 11 April, the third largest weekly increase since 1986. The spread between a risk-free benchmark, in this case maturity-matched overnight interest rate swap rates, and the yield on ten-year US Treasuries also declined.^[2] This spread is sometimes referred to as the convenience yield, insofar as it captures investor willingness to accept the lower yield on US Treasuries because of their greater liquidity, perceived safety and eligibility as collateral. While the spread had already turned negative (as the supplementary leverage ratio regulation de facto discourages large banks from holding US Treasuries), it fell markedly in reaction to the US tariff announcement on 2 April, signalling a further erosion of convenience (Chart A.2, panel a).^[3],[4] Empirical evidence confirms that tariff-related remarks made on social media by President Trump have generally been associated with somewhat lower US convenience yields across a range of maturities (Chart A.2, panel b). This suggests that investors responded to heightened policy uncertainty by repricing US Treasuries as they reassessed the potential economic fallout from escalating trade tensions.^[5] The impact of the 2 April announcement, however, was much greater than usual.

Weaker sentiment around the relative growth outlook and attractiveness of US assets saw a broad-based depreciation of the US dollar, not least against the euro. The US dollar has fallen by 12% against the euro since the start of 2025, around 7 percentage points of which has been since 1 April (Chart A1, panel a). There has also been a sharp adjustment of the economic outlook, as reflected in consensus growth forecasts since 2 April. This marks a shift since the initial optimism that was priced in for the US economy following the 2024 US elections.

Chart A.2

Tariff announcements caused a notable fall in US Treasury interest rate swap spreads

a) US Treasury convenience yields	b) Response of US Treasury convenience yield to US tariff threats
(1 Jan. 2013-18 Nov. 2025, basis points)	(basis points)

Before April, investors held sizeable positions speculating on the US dollar appreciating but quickly reversed these positions after 2 April. In the run-up to the April episode, speculative positions in the US dollar against the euro and other major currencies were at multi-year highs (Chart A.3, panel a). This stretched positioning was at least partly motivated by the positive yield differential that non-US investors were able to earn from their US dollar exposures.^[6] However, speculative positions in the US dollar turned from net long to net short in April and remained so for several months. Recent analyses have shown that the April episode triggered an increase in the hedging of US dollar-denominated asset exposures by non-US investors, especially in Asia, as they took steps to reduce their currency risk.^[7]

Chart A.3

Speculative positions on the US dollar turned short; the positive correlation between US Treasuries and US dollar exchange rates has not been fully restored

a) Speculative positions on the US dollar against other major currencies including the euro	b) Correlation between the ten-year US Treasury yield and the US dollar effective exchange rate
(1 Jan. 2022-30 Sep. 2025, USD billions)	(1 Sep. 2024-18 Nov. 2025, percentages, index)

Empirical evidence confirms that the co-movement of safe-haven financial market variables was atypical in April. The typical positive correlation between US Treasury yields and the US dollar exchange rate, which had been especially strong for much of 2024, turned negative for a period after 2 April (Chart A.3, panel b). The correlation between a “safe-haven factor”, based on a principal component analysis of a range of safe-haven assets, and the US dollar and US Treasuries, further illustrates the different nature of the recent risk-off episode (Chart A.4, panel a).^[8] The blue bars show the typical co-movement and the yellow bars show the co-movement in the period from April to May 2025. Typically, US Treasury yields co-move negatively with the safe-haven factor. Since 2 April, however, US yields have exhibited less negative co-movement with the safe-haven factor. Similarly, the US dollar typically appreciates following a deterioration in global risk sentiment, but this type of co-movement switched signs in April 2025.

What are the implications for euro area investors with US exposures?

As a result of this atypical behaviour, the US dollar temporarily failed to act as a natural hedge for non-US investors. Since 2008, the US dollar has emerged as a barometer of global risk and has appreciated when US equity markets have declined (Chart A.4, panel b), providing a hedge to foreign investors exposed to US dollar assets.^[9] This relationship broke down during the “dash for cash” during the pandemic in early 2020 and again in April 2025. This in turn may have increased hedging demand, putting additional downward pressure on the US dollar.^[10]

Chart A.4

Cross-asset behaviour changed during the April event compared with earlier periods, meaning that unhedged investors were hit by the depreciation of the US dollar

a) Asset price co-movement with safe-haven factor	b) Correlation of US equities with EUR/USD exchange rate
(index)	(Jan. 1999-Apr. 2025, correlation)

The depreciation of the US dollar exacerbated losses on US portfolio investments made by euro area investors. Unusually, the correlation between the return on a balanced US equity and debt portfolio and the change in the US dollar exchange rate against the euro turned positive (Chart A.5, panel a). After a temporary decline, many US asset prices recovered, but the US dollar exchange rate remained weak. In US dollar terms, the return on US assets has been positive, particularly on US equities which have rallied strongly (by around 13%) since the beginning of the year. Yet because of the double-digit depreciation of the US dollar against the euro since the beginning of the year, the return on the US dollar assets of euro area investors who have not hedged their currency risk has been eroded and has even turned negative for US Treasury and corporate bonds (Chart A.5, panel b). In particular, the total return for a US Treasury index, a traditional safe haven for risk-averse investors, was down by around 5 percentage points in euro terms. This potentially calls for the reassessment of unhedged dollar exposures in the portfolios of euro area and foreign investors.

Was the April event unusual and will it happen again?

Similar episodes have occurred in the past, but they were rare. Looking at the historical evidence, the negative correlation of US Treasuries with global risk is unusual, though not unprecedented (for instance at times before 2007) (Chart A.4, panel b).^[11] Moreover, the US dollar also exhibited negative co-movement with other safe-haven assets in the early months of 2017, after the first Trump Administration introduced fiscal stimulus.

Chart A.5

The natural hedge of the US dollar was temporarily lost in April 2025

a) Average changes in EUR/USD, by levels of returns of a balanced US portfolio	b) Returns on US benchmark assets, by currency of investment
(Jan. 2004-Nov. 2025, percentage changes)	(1 Jan.-18 Nov. 2025, percentages)

Market commentary has since debated whether the response to the April events was an isolated anomaly or a structural shift in asset price correlations. On the one hand, the change in the cross-asset correlation could have been a temporary phenomenon, driven by a one-off adjustment of global portfolios reflecting the desire of investors to reduce their exposure to US risk, which had been building up in the current business cycle. At the same time, it could also signal a fundamental shift in the perception of the safety of US dollar assets. This has been accompanied by suggestions of eroding confidence in US institutions (on the back of a tariff-focused trade policy, a retreat from international partnerships, concerns about the independence of the Federal Reserve System and big changes in the stance and composition of fiscal policy, among other things).^[12]

Chart A.6

Investor flows into US assets from the euro area appear to have stabilised since April

a) Net foreign purchases of US Treasury bonds and notes	b) Net foreign purchases of US equities
(June 2024-Sep. 2025, USD billions)	(June 2024-Sep. 2025, USD billions)

While many indicators show a strong rebound in risk appetite and asset prices, there are signs that earlier patterns may not be fully restored. Financial flows recorded in the US Treasury International Capital system show sizeable but short-lived outflows from US assets in April, including both equities and US Treasuries (Chart A.6). There was a strong rebound in May in foreign purchases of US Treasuries and US equities, including by euro area investors.^[13] While the convenience yield has flattened off, it remains lower than it was before April (Chart A.2, panel a). The US dollar has stabilised since July, despite downward pressure from increased hedging of US dollar exposure and growing expectations that the Federal Reserve will cut interest rates further, possibly buoyed by the announcement of trade deals between the United States and many of its trading partners. Yet speculative positions on the US dollar remain mildly negative despite its earlier depreciation, thus not indicative of market expectations for a rebound (Chart A.3, panel a). The correlation between US Treasuries and the US dollar exchange rate is again positive but remains weak, particularly when compared with the close correlation observed in 2024 (Chart A.3, panel b). Some US asset prices (especially equities) and international flows have recovered, and some cross-asset correlations have normalised somewhat, while risk asset pricing has been benign recently. However, a more thorough validation of asset pricing patterns will hinge on the market response to the next major adverse shock. The next section looks at what the implications for financial stability would be if the unusual correlations and financial market responses observed around the April episode were to become the rule rather than the exception.

2 Financial stability implications of shifting cross-asset correlations

What if the change in correlations and financial market responses persists?

Shifting and less predictable cross-asset price correlations pose a risk to financial stability. Shifts in correlations could undermine diversification and hedging strategies, causing asset prices that are normally uncorrelated to fall simultaneously during periods of stress. This could amplify losses, render risk models inaccurate and trigger margin calls and forced selling, potentially leading to liquidity spirals and systemic contagion. When correlations shift unpredictably, investors and policymakers alike lose reliable tools for managing risk and stabilising markets, increasing the likelihood of widespread financial disruption. If the negative correlation between the US dollar, or US Treasuries, and market risk were to persist, this could compromise the use of these assets as a hedge against global shocks.^[14]

Changing cross-asset correlations pose a sizeable challenge for euro area investors, as they hold a large portfolio of US securities. As of the second quarter of 2025, euro area resident entities held more than €12 trillion in foreign portfolio assets, around half of which are securities issued by US entities. At that time, euro area investors held €3.8 trillion of US equities, around €800 billion of US sovereign debt and €1.5 trillion of other US debt securities (Chart A.7, panel a). Exposure to US equities has grown rapidly in the past decade, accounting for one-third (60%) of euro area investors’ total (foreign) portfolio, up from 13% (35%) in 2014. Exposure to US debt securities has risen at a similar pace, although it has been more limited as bond portfolios show a greater degree of home bias than equity portfolios. As of the second quarter of 2025, US sovereign debt securities accounted for 10% (34%) of the total (foreign) sovereign debt portfolio of euro area investors, while other US debt securities accounted for 13% (37%) of the total (foreign) portfolio of euro area investors in these securities.

Which euro area sector could this be a problem for?

Non-banks channel the bulk of euro area investment in the United States and have large exposures to US dollar securities, but they hedge only a fraction of their currency risk. Investment funds account for 75% of euro area investors’ holdings of US equities, almost 50% of their holdings of US sovereign debt and around 60% of their holdings of other US debt securities (Chart A.7, panel b).^[15] The share of US dollar securities in the equity portfolios of non-banks is significant: 60% for pension funds, 50% for investment funds and more than 20% for insurance corporations. The share of US dollar securities in the debt portfolios of non-banks is lower than that for equity, but it is still substantial, with 10% for pension and almost 30% for investment funds (Chart A.8, panel a). While non-banks generally use derivatives to hedge currency risk, a significant share of their currency exposure remains unhedged. According to a recent study, euro area pension funds hedge 57% of the currency risk in their US dollar bond portfolios whereas insurance corporations and investment funds hedge only around one-third of it.^[16] Gross notional US dollar foreign exchange derivatives held by euro area investment funds represent less than 10% of their portfolio of US dollar-denominated securities for equity funds and 55% of US dollar-denominated securities for fixed-income funds (Chart A.8, panel b).^[17] Yet the use of foreign exchange derivatives by euro area investment funds − in particular fixed-income funds − rose last year, signalling increasing interest in hedging US dollar exposures among euro area portfolio managers (Chart A.8, panel c). However, macro-financial uncertainty can strain foreign exchange markets, raising hedging costs in periods of financial stress. Moreover, long-term foreign currency positions are usually hedged via short-term foreign exchange derivatives, giving rise to liquidity mismatches in non-banks’ balance sheets.^[18] Both factors lead to foreign asset fire sales by non-banks or larger currency exposure when financial market volatility increases.^[19]

Chart A.7

The increase in euro area investors’ exposure to US dollar markets has been channelled through non-banks

a) Euro area investors’ securities holdings, by issuer region	b) US securities holdings, by euro area sector
(Q1 2014-Q2 2025; percentages, € trillions)	(Q2 2025, percentages)

Beyond hedging, liquid sovereign bond markets are essential to safeguard financial stability more broadly. Safe assets such as US Treasuries perform two distinct roles that are important for financial stability.^[20] First, they are information-insensitive and can be valued without the need for expensive analysis. They can serve as collateral and a store of value, as their price tends to remain stable or rise in volatile market conditions.^[21] Second, they can be liquidated quickly during stress episodes.^[22] For long-term US Treasuries, the first role (store of value) was challenged in April 2025 and the second role (liquid safe haven) in the dash-for-cash turmoil at the onset of the pandemic in 2020.^[23] However, the US Treasury market remains the largest and most liquid market globally, although liquidity stress can propagate rapidly across jurisdictions (see Box A). It remains of key importance for global financial stability that this market continues to function efficiently.

Chart A.8

Large non-bank exposures to the US dollar; investment funds only partly hedged

a) Euro area non-bank holdings of assets, by currency	b) Euro area non-bank activity in EUR/USD FX derivatives markets	c) Euro area bond and equity fund activity in EUR/USD FX derivatives markets
(Q2 2025, percentages)	(Q2 2025, EUR/USD FX derivative gross notional as percentages of US dollar-denominated assets held)	(Q3 2024-Q2 2025; EUR/USD FX derivative gross notional as percentages of US dollar-denominated assets held)

Box A
Liquidity of euro area and US sovereign debt markets

The US Treasury market is the largest and most liquid market globally, but market liquidity has deteriorated since the US tariff announcements in April. The amount of US Treasury securities outstanding has reached USD 30 trillion (€26 trillion), doubling in size since 2018 (Chart A, panel a). The euro area sovereign bond market has also expanded but is still only about 40% of the size of its US counterpart. Traditionally, US Treasuries exhibit superior liquidity compared with euro area sovereign bonds (even the German Bund). However, liquidity conditions in the United States have deteriorated since the tariff announcements in April, as US bid-ask spreads have widened to some extent and remain above pre-April levels. They are nonetheless still far lower than those in the euro area (Chart A, panel b) and remain tight relative to a longer historical time series (Chart B, panel a). By contrast, euro area sovereign bond market liquidity, which initially deteriorated in parallel with US developments, has recovered more swiftly. This box examines structural trends in market liquidity in the United States and the euro area, drawing on a range of indicators to assess how liquidity evolves in episodes of stress.

Chart A

The US Treasury market is large and liquid, but liquidity has deteriorated recently

a) Size of sovereign bond market in EUR terms, by issuer region	b) Bid-ask spreads for euro area and US sovereign bonds
(2013-25, € trillions)	(1 Jan.-18 Nov. 2025, basis points)

The US Treasury market is generally more liquid than euro area sovereign bond markets, according to a range of indicators. Bid-ask spreads on US Treasuries are typically lower than those on German Bunds – usually the most liquid sovereign bond market in the euro area. Trading volumes in US bond futures are also higher, while a measure of the price impact of trades (the Amihud ratio) is usually lower for US securities (Chart B, panel a). Market breadth is also stronger in the United States, as indicated by the smaller dispersion of bid-ask spreads across securities. Importantly, euro area sovereign bond markets remain more fragmented and heterogeneous, with multiple sovereign issuers that have differing credit quality, issuance practices and market structures.

Liquidity dynamics in the United States and the euro area are similar during stress episodes, reflecting the interconnected nature of global sovereign bond markets. Using data since 2011, the analysis identifies 14 episodes in the United States and 13 in the euro area, most of which are the same for both jurisdictions. The yield curve spline spread measures bond market liquidity by quantifying how actual bond yields deviate from a smooth, fitted yield curve: larger deviations suggest lower liquidity, as prices are less aligned with expected market norms. Unsurprisingly, this measure of market liquidity deteriorates during stress episodes, which tend to cause synchronised liquidity deteriorations in Germany and the United States (Chart B, panel b). A similar pattern holds for other indicators of market liquidity. This suggests that liquidity stress can propagate rapidly across jurisdictions, potentially amplifying financial stability risks in periods of market turbulence.

Chart B

US Treasuries are more liquid than Bunds but exhibit a similar decline in liquidity during stress episodes

a) Historical distribution of market liquidity indicators and latest values	b) Spline spreads of sovereign bonds around stress episodes
(basis points; € billions; ratio; basis points)	(2011-25, basis points)

3 Policy considerations and conclusions

Even though it is not clear whether the April turmoil in financial markets represents a fundamental shift in cross-asset correlations, it does call for euro area investors to pay close attention. The changes in correlation patterns observed in April could be of systemic relevance for euro area markets and investors. Reaping the benefits of global financial integration to diversify risk through exposure to foreign assets and to manage risk in foreign portfolios could be more challenging if the correlation between the securities that represent a substantial share of the portfolio of euro area investors were to become less predictable. Continuing regulatory and supervisory scrutiny of investor risk management practices would be required.

The potential scarcity of safe assets poses challenges from a financial stability perspective. In the last two decades, US Treasuries and the US dollar have tended to act as a stabilising factor in global financial portfolios during periods of financial market stress. Over the short to medium term, this important function cannot easily be replaced by other assets and currencies. Such markets would have to be large, liquid and deep enough to absorb large spikes in demand without sharp price fluctuations when market volatility is elevated. Ultimately, there is little alternative to the US Treasury market in terms of size, liquidity and depth. If the stabilising role of US assets in stress periods were to be compromised, global investors would struggle to find alternative assets to hedge market risk.^[24]

In this context, the creation of a deeper and more liquid market for euro area safe assets could provide important benefits for the euro area – not only from a financial stability perspective but also for strengthening the international role of the euro. It could establish an asset to hedge risk that is not subject to exchange rate risk. A large market for euro area safe asset could also support the smooth transmission of monetary policy and would create a benchmark for other euro area issuers to ensure efficient price discovery.

Immediate and decisive progress is needed on the European savings and investments union, encompassing both the banking and capital markets union.^[25] These initiatives are intended to foster a single large and liquid market, thereby helping to safeguard financial stability. However, progress has not been fast enough to deliver these objectives, and there is an urgent need for relevant institutional players to intensify efforts towards their swift completion. Achieving a single market for capital is essential to mobilise private savings towards productive investment, boost innovation and increase private risk sharing across the euro area, especially in the face of idiosyncratic shocks at the country level. Moreover, this would also strengthen the international role of the euro, as deep and liquid financial markets are fundamental to a currency’s ability to attain international status. A swift agreement and implementation of the upcoming package of proposals on the supervision and integration of EU capital markets would represent an important step towards reaching these objectives.^[26]