1. #1

    Join Date
    Aug 2011
    Lahore, Pakistan
    Blog Entries

    Decoding Flight to Safety in investments

    Come global financial crisis and the world starts talking about flight to safety. In the current market scenario when there is a fear that Greece may exit from Euro Zone and crude price has fallen in an unprecedented way, the term flight to safety is once again being used across the world. The US 10 year treasury yield has fallen below 2% after a long time and the reason attributed for this is also flight to safety. So what does the term “Flight to Safety” mean and what drives investments across world to USA whenever there is a global financial crisis. It is pertinent to note even when 2008 crisis happened, substantial investment from across the world moved to USA though USA itself was in crisis.

    There are two important things to understand in context of flight to safety. US $ is the main reserve currency of the world. Even a country like has pegged its currency against US dollar. So US dollar becomes the natural choice for investments for various entities whether it be a pension fund, mutual fund or any other entity. The second and equally important aspect is that USA has got a very vibrant and developed government debt market which has substantial transparency. The price is the market is mostly decided by forces of demand and supply in US market with only limited interference from the government. Though many critics argue that quantitative easing is a live example of how USA influences its own market as well as global markets.

    Keeping that aside, whenever global financial crisis happens, investors tend to put their money in the safest financial marker in the world which naturally uses dollar as the currency. Investors across the world start selling their investments in a limited way in different markets including emerging markets and move that money to USA. Naturally US financial markets start heating up. The fall in the bond yield has happened because the price of the US Treasury Bonds, supposed to be the safest in the world, has risen substantially. This is purely because of high demand for US government bonds.

    It is very natural for money to find safe haven as and when need for it arises. There is no country in the world which gives investors the confidence that USA gives. Japan is struggling for last two decades, Euro Zone is facing one crisis after another and China lacks transparency. So which country will become natural choice of flight to safety? The answer is obvious and need not be even mentioned.

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