What I would like to discuss today is how we might go about squaring the circle between risk and safety. Risk and safety in the euro area What is the fundamental difference between “safe” and “risky” assets? It is ultimately about how they behave in financial crises.
The prices of safe assets correlate negatively with risk aversion: in financial crises, demand for them soars, driving up their prices and pushing down their yields. This is because they contain no uncertainty about future payments, which means that holders of safe assets have no reason to pass judgement about their probability of default in difficult times. Admittedly, the definition is partly self-referential.