"In October 1989, there was a mini S&P crash. Markets were not as well connected electronically then, and news took longer to travel, even from the equity to fixed income floors within one firm. In fixed income, there was a sudden “Oooh” that spread from desk to desk. Traders, watching bond screens saw a sudden drop in short-term Treasury yields. It took a little longer before they realized that money was rapidly flowing from equities to the safety of short-term Treasuries."
Emanuel Derman, Can One Hedge the Tail Risk in a Fund of Funds? [restricted access], p. 5, footnote 3, November 2011.
This should give a good intuitive understanding of the expression
Flight to quality
It was the subject of a recent conversation with young @Isomorphisms. He was trying characterize the term in a logical but intuitive, though not necessarily quantitative way. I tried to explain as follows (I’ll omit quoting myself on my own blog, on tumblr, no less… that would be REALLY pretentious!):
~~~~ When conditions get discontinuous (“the laws of calculus” or maybe, finite differences, do not apply), flight to quality is driven by perception and instinct. You wrote this two years ago. Not bad at all!
Here’s an analogy: Emotional hysteresis. It would require a very extreme event to disrupt the status quo.
Let’s be specific now. If you were a refugee, with a family, and could get any passport you wanted, which country would you choose to be a citizen of? Canada, Germany, Switzerland, UK, USA, AU/NZ, one of the Scandinavian countries or Japan? All are good.
Which has the most liquid currency, most natural resources, highest GDP per person? I’d go with the USA or Germany. Depending on circumstances, maybe AU/NZ or Japan. That’s my heuristic for understanding flight to quality. ~~~~
Then I saw Derman’s footnote. It was perfect.