OPEC nations are plowing cash into U.S. Treasuries at a more than 50 percent faster rate than all other foreign investors, an unintended benefit of oil prices above $100 a barrel.
Organization of Petroleum Exporting Country members boosted their net purchases of government debt by $43.3 billion, or 20 percent, in the 12 months ended Jan. 31, compared with a 13 percent increase for non-OPEC foreign holdings, Treasury Department data showed last week. With prices up $26 a barrel since Sept. 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 U.S. 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 in a March 13 telephone interview.
The yield on the benchmark 10-year note rose 27 basis points, or 0.27 percentage point, to 2.30 percent last week, 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 2 percent note due February 2022 fell 2 11/32, or $23.44 per $1,000 face amount, to 97 12/32.
The yield rose eight basis points to 2.37 percent at 2:57 p.m. in New York.
The OPEC nations -- Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates and Venezuela -- provide about 44 percent 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 percent 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 Jan. 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 U.S. bonds, according to a Bank of America Corp. report last week.
United Arab Emirates central bank governor Sultan Nasser al-Suwaidi told reporters in Abu Dhabi on Nov. 29 that the country 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 Plc estimates a “large proportion” of those investments are in Treasuries.
Oil-exporters’ higher purchases come amid slowing demand from China, the largest foreign U.S. creditor, which boosted its investment by 0.42 percent in the 12 months ended Jan. 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 Federal Reserve sticks to its forecast that the target rate for overnight loans between banks will remain at a record low zero to 0.25 percent through 2014, according to George Goncalves, head of interest-rate strategy at Nomura Holdings Inc. 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 U.S. 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, up 8.3 percent this year. It was at $107.98 today.
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 percent this year, outperforming the 1.8 percent 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 percent 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 increase in oil cuts 0.5 percentage point off U.S. growth over two years, according to Deutsche Bank AG. The Labor Department said March 16 its consumer price index rose 2.9 percent in February from a year earlier, down from 2011’s high of 3.9 percent in September and in line with the average of 3 percent over the last 30 years.
“Current oil prices are on the cusp of serious demand destruction and pullbacks from the consumer,” Mihir Worah, a managing director at Pacific Investment Management Co. who oversees $105 billion in investments aimed at generating returns higher than inflation, said in a telephone interview 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 U.S., 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 percent of income in 2010, compared with 9.7 percent in 1981, the data showed.
The economy so far shows signs of absorbing higher oil prices. Labor Department data show U.S. 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 percent, the best since September. Gross domestic product will expand 2.2 percent this year, according to economists surveyed by Bloomberg News, from 1.6 percent in 2011.
The U.S. economic recovery will send fixed-income securities lower, UBS AG, one of the 21 primary dealers that underwrite Treasuries, said in a March 16 report.
“The secular bear market in bonds has begun,” according to the report by Larry Hatheway, Sunil Kapadia and Ramin Nakisa in London.
OPEC members last purchased U.S. debt faster than the rest of the world in 2008, when Lehman Brothers Holdings Inc.’s bankruptcy touched off a global financial crisis. They increased buying by 35 percent, more than the 30.4 percent rise by other foreign investors, helping 10-year Treasury yields to drop to 2.21 percent from 4.02 percent at the start of that year.
With Europe suffering with a sovereign debt crisis, there are fewer alternatives to Treasuries for investors seeking the greatest safety. A Bank of America Merrill Lynch index shows the number of issues in its AAA index has fallen to 3,611 from 5,331 in 2007.
“The increase in OPEC buying is consistent with the theme that emerges, that there are fewer safe havens out there,” Aroop Chatterjee, a currency strategist at Barclays Capital Inc. in New York, said in a telephone interview March 13. “Yields are super low. It is telling you it is still a very risk-averse world.”