Finance

Signs of US recovery prompt Saudi Arabia to buy treasury bonds

July 23, 2024, 4:08 AM

The US Treasury building in Washington. US 10-year bond yields closed at 4.2% last week

Holdings up 22% to $136bn in May
Highest level since January 2022
US economy in ‘Goldilocks zone’

Saudi Arabia’s holdings of US bonds rose by 22 percent year on year in May, as the kingdom banked on an economic recovery in the United States.

The May figure of $136.3 billion, released by the US Department of the Treasury, is the highest level of Saudi bond holdings since January 2022.

The kingdom is the 17th-largest holder of US bonds for the month, with Japan at number 1.

Long-term bonds made up 79 percent of the total, at $107 billion. The remaining 21 percent is secured in short-term bonds.

“Overall, the increase in holdings reflects confidence in the US economy and aligns with Saudi Arabia's strategies for safety, diversification and strong economic ties with the US,” said Althea Spinozzi, head of fixed income strategy at the Danish lender Saxo Bank.

US 10-year treasury bond yields closed at 4.2 percent last week, down from a post-Covid high of 4.9 percent in October 2023, indicating a potential shift towards more stable returns, according to Vijay Valecha, chief investment officer at Century Financial.

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Scott Livermore, chief economist at Oxford Economics Middle East, said Saudi Arabia needs substantial official holdings because the Saudi riyal is pegged to the US dollar, but “they have been gradually adding to holdings since about mid last year and likely wanted to capitalise on attractive levels.”

Valecha described the US economy as in a "Goldilocks zone" – neither too hot to cause inflation, nor too cold to risk recession.

“Consumer spending has halved from a year ago, wages are down and the labour market is softening, yet GDP growth forecasts remain positive,” he said.

Recent economic data indicates that inflation is cooling, with the US CPI inflation figures for June coming in at -0.1 percent, against expectations of a 0.1 percent rise, signalling a shift from inflation to disinflation.

The International Monetary Fund is forecasting that US economic growth will increase to 2.6 percent in 2024 from 2.5 percent in 2023, although this is down slightly from its previous forecast of 2.7 percent.

“This unexpected dip has fuelled speculation of a US interest rate cut in September, making long-term bonds an attractive investment opportunity,” said Valecha.

“Given this context, it appears that Saudi Arabia is indeed banking on a US economic recovery.”