People stand in front of a "debt clock" screen displaying Italy's public debt in Rome last February. Photo: AFP/Filippo Monteforte

The cross-currency basis swap between the Japanese yen and the US dollar went steeply into the negative in late September, making US Treasuries unattractive to Japanese investors.

This appears to be driven by funding pressures: Japanese and European banks have borrowed around US$12 trillion from US banks, according to Bank for International Settlements estimates, to fund FX hedges for portfolio investors. Now they are facing constraints. No such constraints, though, are at work when Japanese investors hedge euro securities.

To what extent are Japanese investors involved in Italy’s debt market? The chart below is suggestive, although hardly definitive. We observe that on the two occasions since April when Italy’s 5-year note yield rose sharply, the JPY/EUR 5-year basis swap turned more negative (indicating more demand for hedges from Japanese investors). This could indicate that Japanese investors were buying the dips in the Italian 5-year note.