What economic scenario is referred to as a 'flight to quality'?

A 'flight to quality' refers to a situation where investors choose to move their investments from riskier assets to safer options during times of economic uncertainty or market volatility. This behavior typically occurs when there is heightened fear or concern about potential losses in the equity market or other high-risk investments.

When investors perceive an increased risk, they tend to gravitate toward more stable investments, such as government bonds or blue-chip stocks, which are deemed less likely to suffer significant declines. This shift is a strategic decision aimed at preserving capital and minimizing risk, reflecting a cautious approach to uncertain economic conditions.

The notion of 'quality' in this context signifies reliability and security in investment returns, contrasting with the search for higher yields or returns that often characterizes more risk-seeking behavior. The decision to transition to higher-quality assets underscores a fundamental aspect of investment strategy, especially during tumultuous times in the market.