An increased risk of a financial crisis in the euro area should cause the:
A) demand for all government securities including U.S. Treasury securities to decrease.
B) risk spread between U.S. Treasury bonds and other bonds to decrease.
C) price of U.S. Treasury bonds to increase and the yield on other bonds to increase.
D) price of U.S. Treasury bonds to increase and the yield on other bonds to decrease.

Question

Quizplus · Accepted Answer

When there is an increased risk of a financial crisis, especially in a significant economic area like the euro area, investors tend to seek safer assets, leading to an increased demand for U.S. Treasury bonds, which are considered very safe. This increased demand drives up the price of U.S. Treasury bonds. As bond prices and yields move inversely, the yield on U.S. Treasury bonds would decrease. Meanwhile, the perceived risk of other bonds, especially those from the regions experiencing increased financial risk, would lead investors to demand higher yields as compensation for the higher risk, thus increasing the yield on these other bonds.

An Increased Risk of a Financial Crisis in the Euro