Flight-to-Liquidity

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A Flight-to-Liquidity, or Flight-to-Quality, occurs when investors eschew what they perceive to be less liquid or higher risk investments and purchase more liquid investments instead, such as US Treasuries.

For example, after the Russian government defaulted on their government bonds (GKOs) in 1998 many investors sold European and Japanese government bonds and purchased on-the-run US Treasuries instead. This widened the spread between off-the-run and on-the-run US treasuries, which ultimately led to the collapse of Long-Term Capital Management.

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