Question

Explain the “flight to quality” that is happening in the U.S. bond market due to the uncertainty in the rest of the world and how this impacts the price and interest rates of U.S bonds? Who does this help and hurt? (10)

Answer 1

Flight to quality is the act of moving capital away from risky investments and toward safer investments like US Bond Market due to uncertainty in the rest of the world economy .

Generaly, when the stock market falls suddenly, the price of government bonds rises

This increases the demand for Treasuries increased the price of US Treasuries. The higher the price on the bond, the lower is its yield.

The lowest-risk investments US-Treasuries or Gold get benefit because of sustained and stable net   capital inflows when there is uncertainty in market.

Flight-to-quality effectively reduces diversification benefits across corporate bonds because of high risk factor correlation between the two main risk factors in corporate bond markets: credit risk and liquidity. Lower quality bonds with high yields get .