Currency basis term structure, cross-border investment flow, and central bank currency swap agreement

Abstract

In this study, we analyze the impact of term structure changes of currency basis on cross-border sovereign bond investment flows and that of major central banks' USD funds-supplying operations. We find that changes in short-term USD/JPY basis with less than six-month terms led to a shift in the demand between Japanese government bonds and US Treasury bonds. Results also show that the funds-supplying operations reduced currency basis with less than three-month durations. The banks’ enhanced measures in March 2020 also further reduced the currency basis.