Saudi investments in US government bonds peak to $170bn in March

The Saudi pension fund and the PIF are driving the kingdom's investments into US Treasuries

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Saudi Arabia increased its exposure to US Treasuries, boosting its bond holdings to a peak of $170 billion (Dh624.4bn) as the kingdom restructures investment portfolios of its pension fund and sovereign wealth arm, whose assets have grown to about $300bn.

The Public Investment Fund (PIF), which aims to be the world’s biggest state-controlled fund with $2 trillion of assets under management by 2030, is close to achieving its goal of increasing its assets to $400bn by 2020, the Institute of International Finance (IIF) said in its latest report. The PIF continues to invest in global conglomerates with a renewed focus on international markets, but the majority of its assets are still based in Saudi Arabia.

“We now estimate PIF’s assets at about $300bn, of which, one-fourth are invested abroad,” said Garbis Iradian, IIF’s chief economist for Middle East and North Africa.

The sovereign fund is central to Saudi Arabia’s economic diversification plans embodied in the Vision 2030 transformation road map.

Riyadh plans to deposit proceeds from the kingdom’s privatisation of state assets, estimated to yield $200bn, and the eventual 5 per cent sale of Saudi Aramco that will generate about $100bn, into PIF's coffers. Privatisation proceeds will help increase international investments. Foreign holdings of the PIF include electric car manufacturer Tesla, SoftBank's Vision Fund, Blackstone’s infrastructure fund, Egypt’s investment fund, Russian investment fund, and ride-hailing app Uber, which went public in May.

The PIF, along with the General Organisation for Social Insurance (Gosi), the kingdom’s pension fund, are focused on investments in US bonds. Although Saudi Arabia’s official foreign reserves have declined since 2014, when a three-year oil price slump jolted economies of oil exporting nations, the kingdom’s holdings of US government bonds peaked in March this year.

“The increase in Saudi holdings of US bonds largely reflects the restructuring of the investment portfolios” of Gosi and the PIF, the IIF said.

Its “appetite for US bonds coincided with relatively higher US yields and unfavourable investment sentiment in EMs [emerging markets] and the eurozone,” it said.

Saudi Arabia's push to increase its exposure to US government bonds is in contrast to some of the other nations across the globe. Japan, the second-biggest Asian economy has reduced its holdings of US Treasury securities, while China's holdings of Treasuries have remained roughly stable despite tensions over trade tariffs with the US.

The kingdom, IIF said may hold more US Treasury bonds in custodian accounts in tax-friendly jurisdictions including Luxembourg, Switzerland and the Cayman Islands.

The currency composition of Saudi Arabia's foreign assets holdings also shows a shift away from the euro and UK pound-denominated holdings, IIF said.

Data on cross-border positioning shows that Riyadh's holdings of dollar-denominated assets remained high at about 80 per cent of the total and broadly stable since 2014. At the same time, the kingdom repositioned its assets from euro and UK pounds to US dollars, over the period, IIF explained.