>The flight to liquidity caused them to liquidate positions before they converged, compounding losses. But that wasn't some incidental thing; it indicated that

>The flight to liquidity caused them to liquidate positions before they converged, compounding losses. But that wasn't some incidental thing; it indicated that the core idea behind their arbitrage was flawed -- that there is a reason that the more liquid (US) bonds were consistently overpriced: to account for the fact that, during the occasional crisis, investors flee to them!