The "flight to quality" effect occurs when investors move capital from risky assets (like stocks or high-yield bonds) into safer investments, typically government bonds (e.g., U.S. Treasuries or German Bunds), during economic uncertainty, market turmoil, or geopolitical crises.

How It Works:
When fear rises, demand for safe-haven bonds increases, driving their prices up.

Since bond prices and yields move inversely, higher demand lowers yields (interest rates) on these bonds.

Meanwhile, riskier bonds (e.g., corporate or emerging market debt) see selling pressure, pushing their yields higher as prices drop.

Market Impact:
Government Bonds: Prices surge, yields fall (e.g., 10-year Treasury yields drop during a crisis).

Corporate/Junk Bonds: Prices decline, yields spike due to higher perceived risk.

Interest Rates: Safe-haven demand can suppress long-term rates, even if central banks raise short-term rates.

Examples:
During the 2008 financial crisis, investors fled to U.S. Treasuries, crashing yields.

In 2020, COVID-19 fears triggered a rush into government bonds, briefly pushing U.S. yields to historic lows.

This effect highlights how investor sentiment can distort normal interest rate movements, making government bonds a refuge while amplifying stress in riskier debt markets.