Why does a crisis in emerging markets cause U.S. Treasury yields to decrease?

By Chad Langager AAA
A:

The reason that you will often see the yields on Treasuries fall when you see a financial crisis in an emerging or foreign market is due to what is known as a flight to quality. A flight to quality occurs when market participants move their money from higher risk, or lower quality, investments to lower risk, or higher quality, investments, which is usually triggered by an event in the higher-risk market. (For related reading, see Panic Selling - Capitulation Or Crash?)

When there is a crisis in the emerging markets, such as a geopolitical problem or a financial meltdown, you will often see the market participants in that market sell out and move their money to a safer place. To many, one of the safest places is in U.S. Treasuries, which are government backed debt instruments. As money flows into Treasuries their prices rise, which leads to a decrease in yields. (To learn more about this process, see Advanced Bond Concepts: Yield And Bond Price.)

Remember that with bonds, the price of a bond and its yield have an inverse relationship with each other. Generally, the reason for this is that no matter what happens to the price of the bond over its life, it will still pay the same amount in coupons. Therefore, when the price rises the percent of this payout, or yield, to the price of the bond will decrease.

RELATED FAQS

  1. What are common trading strategies used when identifying a double bottom

    Use simple, low-risk trading strategies to take advantage of a double bottom formation. Traders typically take one of these ...
  2. What is a common price target when identifying a double bottom?

    Learn how to identify a double bottom stock pattern and where to set a target selling price point to get the most out of ...
  3. Are Doji patterns important when trading forex pairs?

    Find out why forex traders make heavy use of candlestick patterns such as the doji, which can be used as a signal of market ...
  4. What are the most common momentum oscillators used in forex trading?

    Explore two frequently used momentum indicators in forex trading, the moving average convergence divergence, or MACD, and ...
RELATED TERMS
  1. Investment Income Ratio

    The ratio of an insurance company’s net investment income to ...
  2. Adjustable Feature

    Contract language that allows adjustments to be made to the premium ...
  3. Development To Policyholder Surplus

    The ratio of an insurer’s loss reserve development to its policyholders’ ...
  4. Overall Liquidity Ratio

    A measurement of a company’s capacity to pay for its liabilities ...
  5. Reinsurance Recoverables to Policyholder Surplus

    The amount of incurred losses covered by reinsurers compared ...
  6. Net Premiums Written To Policyholder Surplus

    A ratio of an insurance company’s gross premiums written less ...

You May Also Like

Related Articles
  1. Investing in emerging market bonds might sound creative and fun, but sometimes it’s more profitable in keeping it simple and close to home.
    Mutual Funds & ETFs

    The EMB Emerging Market Bond ETF: Use ...

  2. Promising high yields that the Eurozone and U.S. can't match, West African sovereign debt has caught the attention of savvy investors.
    Bonds & Fixed Income

    Interested In West African Debt? Look ...

  3. Two years into his first term, Mexican President Enrique Peña Nieto is following through on radical campaign promises he made to Mexican citizens for sweeping multi-industry reform.
    Investing News

    Mexicans Unsure about Mexican Reforms

  4. Missed out on the Alibaba IPO? No problem. These ETFs offer investors easy access to the Chinese e-commerce giant.
    Stock Analysis

    Interested In Alibaba? Eye These ETFs

  5. Economics

    Profiting From China's Breakout: The ...

Trading Center