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 the maturity terms for Treasury bonds?

    Learn how treasury bonds pay interest, when they reach maturity and the differences between terms for treasury bonds and ...
  2. What does a mutual fund's beta coefficient measure?

    Evaluate the risk associated with a particular mutual fund by determining its beta coefficient, which illustrates the fund's ...
  3. What is the difference between EE and I Bonds?

    Read about the similarities and differences between the EE and I savings bond programs created by the U.S. Department of ...
  4. How do I judge a mutual fund's performance?

    Evaluate mutual fund performance utilizing resources such as Morningstar; compare the fund with others in its peer group ...
RELATED TERMS
  1. Net Premiums Written To Policyholder Surplus

    A ratio of an insurance company’s gross premiums written less ...
  2. Net Liabilities To Policyholders' Surplus

    The ratio of an insurer’s liabilities, including unpaid claims, ...
  3. Chartered Property Casualty Underwriter (CPCU)

    A professional credential earned by individuals who specialize ...
  4. Net Leverage

    The sum of an insurance company’s net premiums written ratio ...
  5. Gross Leverage Ratio

    The sum of an insurance company’s net leverage ratio and its ...
  6. Reserves To Policyholders' Surplus Ratio

    The ratio of an insurer’s reserves set aside for unpaid losses ...
Related Articles
  1. Interested In Latin America? Eye These ...
    Mutual Funds & ETFs

    Interested In Latin America? Eye These ...

  2. Eyeing China? Consider These Economic ...
    Economics

    Eyeing China? Consider These Economic ...

  3. The 10 Biggest Latin American Banks
    Investing Basics

    The 10 Biggest Latin American Banks

  4. Where International Real Estate Is Booming
    Economics

    Where International Real Estate Is Booming

  5. What is Alibaba?
    Investing News

    What is Alibaba?

Trading Center