Earlier this summer, when Great Britain’s Brexit referendum to leave the European Union devalued the British pound and briefly crippled stock markets around the world, one investment vehicle remained relatively unscathed: U.S. government bonds. During a period in which the NASDAQ fell 4% and the Nikkei dropped 8%, U.S. government bond prices rose, suggesting that U.S. bonds and the debt they represent offer a safe haven for institutional investors during times of turmoil. Such an environment keeps bond demand high and yields low, since prices and yields are negatively related.
The market response proved some of
the exact points made in a recent paper by
finance professor Arvind Krishnamurthy
of Stanford GSB.
A scholar explains why the answer is yes.
BY MATT VILLANO
Arvind Krishnamurthy is the
John S. Osterweis Professor of
Finance at Stanford GSB.
Photograph by Drew Kelly