But the trade becomes especially lucrative because of the basis spread on the cross-currency swap, which determines the cost to convert payments from one currency to another. The swelling appetite for dollars has led that spread to roughly double in the past year, to  65 basis points, or 0.65 percentage point, close to a 2011 high. The dollar lender also receives that amount.

All in, the dollar-hedged yield on three-month Japanese bills is 1.25 percent, near the highest in at least five years, Bloomberg data show.

“This is a quasi-money-market trade, and it looks like a very efficient and appealing thing to do,” said Quentin Fitzsimmons, a money manager in the global fixed-income group in London at T. Rowe Price, which oversees $777 billion. “Yet that distortion has been present for quite a long time -- it hasn’t been arbitraged away.”

The appeal of the trade may explain why three of the top 11 holdings in Pimco’s Foreign Bond Fund as of March 31 were Japanese bills due in May and June. Over the next three months it raised its allocation to Japan by four percentage points, to 38 percent when weighted by duration, the biggest increase of any region. The fund’s roughly 7 percent average annual return for the past three years tops 99 percent of peers, Bloomberg data show.

Longer View

Yet many American banks and money managers are forgoing the opportunity. For one thing, not all funds hedge currency exposure. Other institutions are constrained by Japan’s credit rating, which is four steps below the U.S.’s Aaa ranking from Moody’s Investors Service.

The trade, short-term by nature, also involves reinvestment risk, if the aim is to roll over the position. When the money manager gets the cash back three months down the road, market gyrations in the interim may have made the yield pickup less attractive.

“The short-term Libor arbitraging isn’t really something that we’re doing,” said John Lovito, who oversees international bond funds in New York at American Century Investments, which manages $154 billion. “We’re more medium to long-term investors. It’s more about the bond placement and the sectors we want to buy.”

Morocco Beckons

Yet for the intrepid global bond investor with dollars to put to work, there are ways to exploit the quirk with longer-maturity debt, and not just in Japan. The same distortions in the hedging market have created opportunities in euro debt as well.