Fragility of Safe Asset Markets

55 Pages Posted: 18 Jul 2022 Last revised: 10 Aug 2023

See all articles by Thomas M. Eisenbach

Thomas M. Eisenbach

Federal Reserve Bank of New York

Gregory Phelan

Williams College; Office of Financial Research, US Department of the Treasury

Multiple version iconThere are 2 versions of this paper

Date Written: July 1, 2022


In March 2020, safe asset markets experienced surprising and unprecedented price crashes. We explain how strategic investor behavior can create such market fragility in a model with investors valuing safety, investors valuing liquidity, and constrained dealers. While safety investors and liquidity investors can interact symbiotically with offsetting trades in times of stress, liquidity investors’ strategic interaction harbors the potential for self-fulfilling fragility. When the market is fragile, standard flight-to-safety can have a destabilizing effect and trigger a “dash-for-cash” by liquidity investors. Well-designed policy interventions can reduce market fragility ex ante and restore orderly functioning ex post.

Keywords: safe assets, liquidity shocks, global games, treasury securities, COVID-19

JEL Classification: C7, G01, G1, E4, E5

Suggested Citation

Eisenbach, Thomas M. and Phelan, Gregory, Fragility of Safe Asset Markets (July 1, 2022). FRB of New York Staff Report No. 1026, Rev. August 2023, Available at SSRN: or

Thomas M. Eisenbach (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States
212-720-6089 (Phone)


Gregory Phelan

Williams College ( email )

Williamstown, MA 01267
United States


Office of Financial Research, US Department of the Treasury ( email )

717 14th Street, NW
Washington, DC 20220
United States

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