The markets keep moving fluidly from risk-on to risk-off (called RO/RO by some). Risk on is when the investors start buying riskier assets like equity, as a result bond prices start declining. Risk-off is the reverse when riskier assets are shunned and markets pile on lesser risky assets like bonds (bonds are not risk-free anymore, hence less risky).
McCauley helps understand this in a much more macro setting. He helps explain the flow of funds between international investors and central banks of developed and emerging economies. How funds flow from the investors to these central banks in RO/RO situations is quite a read:
The international flow of funds associated with risk-on and risk-off markets are gross flows with asymmetric risk characteristics. In risk-on markets leveraged and unleveraged global investors position themselves in high-beta emerging market assets. In response, emerging market central banks that manage their currencies tend to increase their reserves, investing them in safe assets in reserve currencies. To the extent that this investment pushes down global bond yields, the risk-on is reinforced. The international flow of funds produces not an exchange of risky assets but an acquisition of risky assets on one side and an acquisition of safe assets on the other.
When risk is off, the international flow of funds reverses. An implication is that global investors are behaving as if they were replicating a call option on risky emerging market assets. Another implication is that emerging market investors and central banks accommodate global investors: emerging market investors buy back the risky assets when risk is off (providing market liquidity at times of financial strain) and emerging market central banks sell back safe assets into global investors’ flight to quality bid. In these senses, one could say that emerging markets provide liquidity to global investors in risk-off markets.
He says some other interesting things as well. For instance we usually take changes in forex reserves of EMEs in the spot market. However, some emerging economy central banks use the forward market very actively. So we need to take the changes adding the forward market transactions as well. This is important as otherwise the reserves are either overstated or understated.