Fragility of Safe Asset Markets

50 Pages Posted: 18 Jul 2022

See all articles by Thomas M. Eisenbach

Thomas M. Eisenbach

Federal Reserve Bank of New York

Gregory Phelan

Williams College

Date Written: July 2022


We model a safe asset market 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, we show that liquidity investors’ strategic interaction harbors the potential for self-fulfilling fragility. Surprisingly, standard flight to safety in times of stress can have a destabilizing effect and trigger a dash for cash by liquidity investors. This explains how safe asset markets can experience price crashes, as in March 2020. The announcement and execution of policy interventions play important roles for the functioning of safe asset markets.

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 2022). FRB of New York Staff Report No. 1026, 2022, 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

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