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Why Are People So Willing to Hold U.S. Treasuries?

Gillian Tett:

Cash-rich investors choose crazy Treasury returns: Why does money keep flooding into the short-term Treasuries market…?. There are plenty of explanations around…. [T]here is another factor investors should watch: what companies and asset managers are doing with their spare “cash”…. Zoltan Pozsar…. The issue at stake revolves around the “cash” which companies, asset managers and securities lenders (such as custodial banks) hold on their balance sheets. Two decades ago, these cash pools were modest, totalling just $100bn across the globe…. But in recent years, these pools have exploded in size, as the asset management sector has consolidated and companies have centralised their treasury functions. Institutional cash managers now control between $2,000bn and $4,000bn globally….

That is startling. But what is more striking is where this “cash” has ended up. Two decades ago, it typically was placed in bank accounts. But in recent years, cash managers have started to avoid banks: in 2007, for example, just 16-20 per cent of these funds were on deposit. Why? Pozsar thinks the key factor was risk management…. [T]hey have hunted for alternatives that seemed liquid and safer than uninsured bank accounts, such as repurchase deals (backed by collateral), money market funds (often implicitly backed by banks), or highly rated short term securities (such as triple A rated asset backed commercial paper or mortgage bonds.) Pozsar argues that this has created a big distortion in the monetary aggregates….

Since 2008, large parts of the shadow banking world have all but collapsed. Thus cash managers are now frantically searching for new places to put their “cash”. Some has flooded into money market funds (which buy government bonds) or the repo world (often backed by bonds); some money has entered the T-bill market directly. Either way, the net result is a shortage of T-bills, particularly since banks and clearing houses are also gobbling up T-bills for regulatory purposes. Hence the low yields. From an investment perspective, these returns may seem crazy; but they are still attractive to cash managers because T-bills are liquid – and, most crucially, seem less risky than uninsured bank deposits…