Holdings of Treasuries by oil producers and institutions such as UK banks that are proxies for Middle East nations rose 44 per cent this year to $510.8 billion through April, four times faster than the rest of the world, according to the Treasury Department's most recent data. At the current pace, they'll surpass Japan, which holds $592.2 billion, as the largest owner this month.
While the investment of so-called petrodollars into government debt is helping to temper a rise in borrowing costs as the US finances a record budget deficit, it highlights America's dependence on foreign money. New York's Chrysler Building was bought last week by Middle East investors.
"We should be happy that they're buying US Treasuries because they're keeping interest rates low, and that's a positive for bond investors,'' said Gary Pollack, who helps oversee $12 billion as head of fixed-income trading at Deutsche Bank AG's Private Wealth Management unit in New York. "Whether there's geopolitical risk is something else.''
The benchmark 10-year note's yield fell 2 basis points, or 0.02 percentage point, to 3.96 per cent last week, according to BGCantor Market Data. It touched 3.78 per cent on July 10, the lowest since May 21.
The price of the 3.875 per cent security due in May 2018 rose 5/32, or $1.56 per $1,000 face amount, to 99 10/32. The yield climbed to 4.01 percent on Monday as of 12:01 p.m. in Tokyo.
Yields on 10-year notes are 21 basis points lower because of the investment by oil-producing nations, New York-based consulting company McKinsey & Co said in October, when oil was $86 a barrel. Prices touched a record $147.27 on July 11.
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Assets held by oil exporters swelled to $4.6 trillion at the end of 2007, according to McKinsey. They're pouring that money into Treasuries as losses on alternatives such as equities and corporate debt mount amid the collapse of the U.S. subprime mortgage market. Merrill Lynch & Co. indexes show Treasuries have returned 2.5 percent this year, while major stock indexes in the U.S., Europe and Asia have tumbled at least 10 percent.
The Organization of Petroleum Exporting Countries held $153.9 billion in Treasuries at the end of April, Russia had $60.2 billion and Norway owned $45.3 billion, according to the Treasury Department. Combined, that represents a 113 percent increase from 12 months earlier.
Oil producers own a majority of the $251.4 billion in Treasuries held in the U.K., an 85 percent increase.
Since the 1960s the U.K. has acted as a financial center where international investors purchase and hold securities, according to the Bank of International Settlements.
Morgan Stanley's chief Treasury strategist, George Goncalves, estimates that only $50 billion of the U.K.'s Treasuries are owned by investors based in the country. The rest belong to investors primarily from OPEC and Russia, as well as China, he said.
The Treasury will release data on May holdings on July 16. Oil-producing nations have surpassed China, which owns $502 billion of U.S. government debt, and are increasing their holdings as Japan cuts back. The nation reduced its stake in Treasuries by 3.6 percent the past 12 months.