US Government Debt Different - Finance Department - University of ...

40 A Macro View of Shadow Banking: Do T-Bill Shortages Pose a New Triffi n Dilemma?prior to the crisis, with the exception of Eurodollar deposits, all otherinstruments yielded less than CDs. Thus, while liabilities issued byshadow banks - repos and ABCP - yielded more than Treasury bills,they yielded less than uninsured deposits (see Figure 3-3)! Thus, ifsearch for yield would have been the only consideration of investors,the system would all have migrated toward uninsured deposits. However,they did not, since they were constrained by safety concernsand risk management caps set on unsecured counterparty exposures.Therefore, investing in shadow bank liabilities was as much a story ofsearch for yield relative to Treasury bills as it was of the inability toput one’s hands on enough T-Bills given its supply constraints.Figure 3-3 Search for yield with boundsSource: Pozsar (2011)The insight that there was a shortage of U.S. Treasury bills to investin also puts in perspective the fact that the wisest money managershad the wisdom and foresight not to stray too far away from theultimate safety of Treasury bills (if held directly) or government-onlymoney funds (if held indirectly). Arguments that other managers“should have known their risks better” ignore the fact that, at the systemlevel, given supply-demand balances, everyone would not havebeen able to invest their cash safely into the ultimately safe asset:U.S. Treasury bills. Of the three types of institutional cash investors,the rise of foreign reserve managers (the most safety conscious andyield inconsiderate of institutional cash investors) was a key reason