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Saudi Arabia's US$117 billion treasuries tally poses fresh puzzle

[NEW YORK] After the US government's first-ever release quantifying Saudi Arabia's Treasuries holdings, a question echoed through Wall Street: That's it?

The kingdom held US$116.8 billion of Treasuries as of March, according to data that the Treasury Department released Monday in response to a Freedom-of-Information Act request submitted by Bloomberg News. It's the first time the US disclosed a breakdown for the world's biggest oil exporter, after lumping it in with a group of other oil producers since 1974.

The tally is about 20 per cent of the country's US$587 billion of foreign reserves, and roughly 10 per cent of the stockpiles of China and Japan. The figure is also dwarfed by the US$750 billion of Treasuries and other dollar-denominated assets the kingdom threatened to sell if Congress passes a bill allowing the monarchy to be held liable in US courts for the Sept 11, 2001, terror attacks, the New York Times reportedin April.

While the tally solves one puzzle, it introduces another: Central banks typically keep about two-thirds of reserves in dollar-denominated assets, according to the International Monetary Fund. And because Saudi Arabia's riyal is pegged to the dollar and its main export - oil - is priced in the greenback, the kingdom should keep an even larger share of reserves in dollar-denominated securities like Treasuries, according to strategists.

That leaves just a few options for the remaining dollar- denominated investments, if they exist. The kingdom's reserve fund may hold fewer dollar-denominated securities than most expect, it may be parking securities in custody at the Federal Reserve Bank of New York or elsewhere, or it may own other securities that don't show up in the Treasury's data, such as stocks, derivatives or non-government debt.

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"They could have positions in futures that wouldn't be counted in here," or holdings in another country, said Thomas Simons, a money-market economist in New York with Jefferies Group LLC, one of the 23 primary dealers. But the puzzle is the amount of assets the nation would need to hold elsewhere, he said. "We're talking about more than twice what they have domestically."

"It's nice to know this," although "the Saudis may own much more in holdings through entities in third countries," said David Wessel, a senior fellow in economic studies at the Brookings Institution in Washington.

A chunk of central-bank ownership of Treasuries isn't reflected in the data. Global central banks have US$2.9 trillion of custody holdings with the Fed, on top of the US$6.3 trillion of foreign holdings of US government debt tracked by the Treasury.

A Treasury spokeswoman, Whitney Smith, said that ownership of Treasuries by Saudi residents is near a record high. The data indicate that the nation's holdings have dropped 6 per cent from a peak in January. That trend doesn't necessarily send an alarming signal though, given that the trove was below US$100 billion as recently as 2014.

"It's not necessarily a bad picture at all," said Aaron Kohli, a fixed-income strategist in New York for BMO Capital Markets, a primary dealer. "A lot of people make unwarranted assumptions about the amount of sales from some corners of the world," but "it looks like the opposite has been happening." -With assistance from Taylor Hall and Rachel Evans.


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