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What is flight-to-liquidity?

Flight-to-liquidity

A sudden shift in which a large number of investors sell illiquid assets in order to buy liquid assets. This can lead to panic and in some cases has triggered a financial crisis.

Where have you heard about flight-to-liquidity?

The collapse of the Long-Term Capital Management hedge fund in 1998 was largely a result of a flight-to-liquidity following the 1998 Russian financial crisis.

What you need to know about flight-to-liquidity.

Flight-to-liquidity usually takes place when there’s uncertainty in the market or wider economy. Investors may decide to rebalance their portfolios in favour of liquid securities which can be quickly bought or sold on the market. This gives them more flexibility with buying and selling if the market tumbles.

Small-scale flight-to-liquidity can occur on a day-to-day basis. But where there is significant market uncertainty, a rush to chase the most liquid securities, such as US Treasuries, can lead to a crisis situation.

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