ABSTRACT
This chapter switches to the demand side of safe assets. It discusses the motives of various financial market participants for safe assets. It debates the drivers of central, commercial banks and other market participants’ (both financial and non-financial entities) demand for safe investments. The crucial idea is the demand for safety, unlike the demand for liquidity. The demand for safety plays a fundamental role in shaping contract terms and the financial intermediary structure, influencing price levels and international market segmentation. Commercial banks are among the largest safe asset holders, which is mainly due to the fact that they act as primary dealers and market makers. Additionally, they use those instruments as collateral in repo and derivative transactions to manage maturity mismatches between assets and liabilities. Regarding central banks’ demand, there are two main motives behind their holding of safe assets: interventional and precautionary. A comprehensive examination of the structure and dynamics of central banks’ official reserve assets can explain contemporary trends in the international monetary system and domestic monetary policies. The composition of foreign exchange and gold stock can explain the scale of demand for safe assets. Gold reserves are of special attention. Since the 2022 inflation spike and the gold fever of emerging economies, the world gold holdings in central banks’ assets have increased drastically. Sovereign wealth funds’ (SWF) demand for safe assets is also notable, as they are sometimes referred to as reserve substitutes. Stabilisation funds exhibit the greatest demand among these types of entities. The investment strategies adopted by central banks and public sector SWFs focus on safety, followed by liquidity and return. The chapter ends by discussing a global safe asset provider, the United States.
