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.

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