Opec nations are plowing cash into US treasuries at a more than 50% faster rate than all other foreign investors, an unintended benefit of oil prices above $100 a barrel.
Organisation of Petroleum Exporting Country members increased their net purchases of government debt by $43.3 billion, or 20%, in the 12 months ended January 31, compared with a 13% rise for non-Opec foreign holdings, Treasury Department data showed last week. With prices up $26 a barrel since September 30, producers have an additional $780 million in profits every day, according to data compiled by Bloomberg.
International investors, which own about $5 trillion, or half of the marketable US government debt outstanding, are key to President Barack Obama’s administration financing a budget deficit forecast to exceed $1 trillion for a fourth year. Opec’s purchases may help temper a plunge in Treasuries after yields surged last week by the most since January 2009 amid gains in jobs, retail sales, and manufacturing.
“With the price of oil hovering around triple digits the profits have to go somewhere,” said Kevin Flanagan, the Purchase, New York-based chief fixed-income strategist at Morgan Stanley Smith Barney, the world’s largest brokerage, with assets of $1.78 trillion. “You don’t hear about dollar diversification anymore. The only game in town is the dollar, and if you are sitting on dollars it only makes sense to buy Treasuries,” he said on March 13.
The yield on the benchmark 10-year note rose 27 basis points, or 0.27 percentage point, to 2.30% last week in New York, according to Bloomberg Bond Trader prices. The increase was the most since yields jumped 32 basis points in the five days ended July 1.
The Opec nations — Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates and Venezuela — provide about 44% of the world’s oil.
They will earn $1.105 trillion in 2012, up from an estimated $1.01 trillion last year, which was a 30% increase from $778 billion in 2010, the government’s Energy Information Administration in Washington said.
They held $258.8 billion of the $10.428 trillion of Treasuries outstanding as of January 31, up from $215.5 billion a year earlier and $211.9 billion in January 2010, Treasury Department data show.
Thanks to booming profits, the currency reserves of oil exporting nations have grown by $73 billion since January to more than $400 billion, creating more dollars to buy US bonds, according to a Bank of America report last week.
United Arab Emirates central bank governor Sultan Nasser al-Suwaidi told reporters in Abu Dhabi on November 29 that the nation was resuming investing in Treasuries, after saying in July it didn’t hold them because of “very low” returns.Saudi Arabia owned a record $350 billion in foreign securities as of June 30, central bank data show. HSBC Holdings estimates a “large proportion” of those investments are in Treasuries.
Oil-exporters’ higher purchases come amid slowing demand from China, the largest foreign US creditor, which boosted its investment by 0.42 % in the 12 months ended January 31 to $1.16 trillion, the smallest increase over the same period on record.
The world’s second-largest economy’s holdings fell from a high of $1.31 trillion in July, Treasury data show.
“The boost in purchases from Opec nations has been a welcome development to the Treasury Department,” Eric Lascelles, the chief economist at Toronto-based Royal Bank of Canada Global Asset Management, which oversees about $252 billion, said in a March telephone interview.
Opec nations may slow their purchases of treasuries and switch to higher-yielding assets should inflation accelerate and yields fail to move higher as the Fed sticks to its forecast that the target rate for overnight loans between banks will remain at a record low zero to 0.25% through 2014, according to George Goncalves, head of interest-rate strategy at Nomura Holdings in New York.
“In 2008 they were dipping in with both hands, but the Fed is pricing them out of the market with rates so low,” Goncalves said in a telephone interview March 14 in reference to Opec nations. Nomura is one of the 21 primary dealers of US government debt that are obligated to bid at Treasury auctions. Crude for April delivery rose $1.95 to $107.06 a barrel on the New York Mercantile Exchange on March 16 and were up 8.3% this year.
Rising energy prices typically accompany faster economic growth, which has the potential to hurt bond prices as investors switch into riskier assets and avoid those that lose value when inflation accelerates. The Standard & Poor’s 500 index has risen 12% this year, outperforming the 1.8% loss in Treasuries as measured by Bank of America Merrill Lynch indexes.
Rather than adding to inflation, oil prices hovering at about $100 a barrel, almost 60% above the average price of $64 for the past decade, may drag on the economy. Gasoline prices were $3.80 a gallon on March 13, according to the American Automobile Association, almost a dollar higher than the $2.98 average over the past five years.
An extended $10 rise in oil cuts 0.5 percentage point off US growth over two years, according to Deutsche Bank. The Labor Department said on March 16 that its consumer price index rose 2.9% in February from a year earlier, down from 2011’s high of 3.9% in September and in line with the average of 3% over the last 30 years.
“Current oil prices are on the cusp of serious demand destruction and pullbacks from the consumer,” said Mihir Worah, a managing director at Pacific Investment Management who oversees $105 billion in investments aimed at generating returns higher than inflation, in a interview on March 13. “It’s inflationary over the short term, but will be a drag on growth if prices stay elevated.”
Even with this year’s gains, the cost of a barrel of crude in the US, adjusted for total disposable income, is down from the peak of $213.44 in January 1981, according to data compiled by Bloomberg and the Energy and Commerce Departments. Oil consumption was 4.8% of income in 2010, compared with 9.7% in 1981, the data showed.
The economy so far shows signs of absorbing higher oil prices. Labor Department data show US employers added 1.2 million jobs in the last six months, the most since the same period ended May 2006. Retail sales in February rose by 1.1%, the best since September. Gross domestic product will expand 2.2% this year, according to the median forecast of 90 economists in a Bloomberg News survey, from 1.6% in 2011.