The fact that transaction volumes of FX swaps are positively correlated with inward bond investments underscores the investment patterns of overseas non-banks regarding FX-hedged investments in JGSs (Chart 12). In an environment where the demand-supply balance of dollar safe assets is very tight, FX-hedged investments in JGSs may be viewed by investors as safe assets substitutable for U.S. government securities.
The Swap Market and the Amplification of Procyclicality in Global Liquidity One note of caution here is that FX-hedged Japanese government paper is not always a stable substitute for U.S. government paper just as debt instruments issued by banks. In other words, overseas non-banks cannot be regarded as stable sources of U.S. dollar funding.