Another TACO Trade? Geopolitical Shock May Be a Buying Opportunity

Key Takeaways

• U.S. stocks sold off sharply as geopolitical risks triggered a broad risk-off move.

• Gold surged to record highs while bond yields climbed, signaling systemic stress.

• Investors are reassessing U.S. political risk and Fed independence concerns.

• Options markets show early signs of hedging activity by smart money.

• Past experience suggests political shocks often fade, creating tactical buying opportunities.

U.S. stocks fell sharply, with benchmark equity indexes sinking more than 2%. The dollar index weakened against most major currencies, while 30-year Treasury yields climbed toward 5%. Safe-haven assets surged, with gold hitting a record high.

President Trump’s attempt to bring Greenland under U.S. control, coupled with threats to impose tariffs on European allies, has reignited fears of renewed trade frictions and sharply lifted market volatility.

According to a Bloomberg interview, Shiyan Cao of hedge fund Winshore Capital said the situation has introduced a meaningful tail risk. “It opens up a tail risk — that people don’t want U.S. assets,” Cao said. “You have to put on some risk premium for political reasons.”

Cao added that volatility remains too low relative to his models based on economic indicators such as policy rates, inflation, and growth. “Everyone is waiting for the next shoe to drop — and there are many shoes in the pipeline,” he said.

Supreme Court Risk Looms

Markets are also facing upcoming risk events, notably the U.S. Supreme Court, which will hear arguments related to Trump’s attempt to dismiss Federal Reserve Governor Lisa Cook.

If the court sides with Trump, it could pose a serious threat to the Federal Reserve’s independence and potentially trigger a sharp selloff in U.S. Treasurys.

Smart Money Begins Hedging

Some smart money is already seeking protection. Options markets show traders buying contracts that bet the benchmark 10-year Treasury yield will rise from around 4.29% to approximately 4.35%.

The simultaneous selloff in both fixed income and equities is a worrying signal for Michael Thompson, co-portfolio manager at Little Harbor Advisors. “In our view, today’s risk-off move looks more like a systemic event rather than an idiosyncratic issue,” he said. “That tells us this is a good time to start building hedging positions.”

Another TACO Trade? Risk Shock as a Buying Opportunity

Despite Trump’s threats to use military force to annex Greenland and impose tariffs, markets broadly believe these threats are unlikely to materialize, particularly after last April’s tariff-related TACO trade, when fears ultimately faded.

According to a Bloomberg interview , Jefferies strategist Mohit Kumar speculated that a deal will eventually be reached to defuse tensions over Greenland. However, he cautioned that negotiations could take months, leaving markets facing elevated volatility in the interim.

“Beneficiaries of rising geopolitical tensions would be defense stocks, financials, and gold — and we are long these in our portfolio,” Kumar wrote.

Vanguard’s senior client portfolio manager Sam Martinez noted that the broader backdrop remains intact, suggesting volatility may recede. “Geopolitical shocks typically take time to unfold and often have their greatest market impact early on, when rhetoric is most extreme,” Martinez said.

“Over time, these positions tend to moderate as the economic costs of a harsher stance come into focus,” he added, “There is no reason to believe the current situation won’t follow a similar pattern, but we will continue to monitor developments closely and adjust as needed.”

U.S. Assets: Too Big to Ignore

Denmark’s pension fund Akademiker Pension announced it will exit its U.S. Treasury holdings by the end of the month, citing concerns that the Trump administration has created non-negligible credit risk. However, the fund’s exposure is relatively small, at around $100 million, and is unlikely to be widely replicated.

“Diversifying away from America is impossible,” UBS Chief Executive Officer Sergio Ermotti said in a Bloomberg Television interview at the World Economic Forum in Davos, Switzerland. “The U.S. is the strongest economy in the world.”