Financial integration and hedging and safe haven properties of metals for sovereign bonds

• Industrial metals outperform precious metals as a hedge for government bonds. • Hedging properties of industrial metals weaken in times of low bond integration. • Inflation and exchange rates have a minor economic effect on hedging properties. Previous research has shown that industrial metals outperform gold and other precious metals in terms of hedging and safe haven properties for sovereign bond holdings. We argue that the strength of these properties depends on how much the sovereign bond is globally integrated. We therefore model the hedging and safe haven properties of metals for sovereign bonds as moderated by how much bond returns are globally integrated. Our evidence from the sovereign bonds of 24 countries shows that industrial metals provide a stronger hedge and safe haven when sovereigns are more integrated, whereas precious metals do not. The inflation and exchange rates also affect the hedging properties of metals, but bond integration has the strongest economic effect. This evidence helps explain why metals are excellent hedging or safe haven assets for some sovereign bond investors but not for others.