US investors could put more than $470 billion to work in US treasuries if Asia’s appetite for dollars continues to fall. According to analysts at CreditSights, US banks, mutual funds, insurance companies, and money market funds are all significantly underweight treasuries relative to historical levels.
“The US money market mutual funds were the most shocking,” said senior analyst Christian Stracke at CreditSights’ recent London conference. “They are barely invested.” According to their latest annual or semi-annual reports, of the five largest US money market funds by assets, three – the Merrill Lynch CMA fund, Smith Barney’s Cash Portfolio fund, and the Vanguard MMR Prime Portfolio – held no US treasuries at all. Just 0.4% of the Fidelity Cash Reserves fund was invested in treasuries. The figure for the Schwab Money Market Fund was 1.3%.
If US commercial banks and life insurers returned to their 1996 exposure to US treasuries, if larger retail fixed-income funds moved to market weight, and if the top 20 money market funds all had a 20% allocation to treasuries, that would amount to $469 billion of demand. And that’s without assessing the impact of similar moves from pension funds, non-life insurers, investment banks and brokers.