UAE Central Bank turns to US treasuries

In a turnaround from four months ago, the Central Bank is investing in US treasuries again, says governor Sultan al Suwaidi.

"Now the investment rate is reasonable so we do invest in the US treasury," says Sultan bin Nasser Al Suwaidi, the Governor of Central Bank. Andrew Henderson / The National

The Central Bank is investing in US treasuries again, its governor Sultan bin Nasser Al Suwaidi said yesterday, as the institution seeks a haven from the euro-zone sovereign debt turmoil.

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Mr Al Suwaidi's comments represent a turnaround from four months ago, when the Central Bank said it held no US government debt.

The change indicates that escalating worries over Europe, evidenced by a heavy sell-off of euro-zone sovereign debt, have persuaded the Central Bank to reassess its investment focus.

"Now we do invest [in US treasuries] because circumstances change, so we change," said Mr Al Suwaidi.

"Now the investment rate is reasonable so we do invest in the US treasury."

At the height of concerns about the fallout from a deadlock on resolving the US government's debt limit, the Central Bank in July said it held no US treasuries or other US government financial instruments.

Despite holding most of its foreign reserves in US dollars, the regulator's holdings were invested mostly in non-US assets, said the statement at the time.

The bank did not hold US treasury bonds or any other US government financial instruments because of their "very low" return, it said.

Since then, however, concerns about the US's fiscal troubles have been overtaken by the debt crisis ripping through the euro zone.

US treasuries due in 10 years and more have provided returns of almost 10 per cent this year, the highest among 144 bond indexes compiled by Bloomberg News and the European Federation of Financial Analysts Societies after taking into account fluctuations in currency rates.

In contrast, investors have shied away from euro-zone debt as risks of recession or even a break-up of the monetary union create an uncertain outlook for returns. In its latest bond auction yesterday, Italy again had to pay investors yields above 7 per cent, a borrowing level that previously forced Greece, Portugal and Ireland to seek bailouts.

Turbulent global economic conditions were encouraging the Central Bank to seek refuge in US treasuries, said Giyas Gokkent, the chief economist of National Bank of Abu Dhabi.

"The level of uncertainty in the euro zone is probably the main driver," he said. "In a shock period investors tend to invest much more conservatively and need to make sure they're in the right assets."

The Central Bank's foreign currency assets stood at Dh199 billion (US$54.17bn) in June, according the latest Central Bank data. Of that, Dh86bn was in foreign securities, Dh74.86bn in deposits and Dh36.7bn in Dubai bonds. Dh1.5bn was in other assets.

Mr Al Suwaidi also reiterated the UAE's commitment to the dirham's peg to the dollar. The dollar link had served the economy well, he said.

The UAE has strong connections with the dollar, the world's foremost reserve currency. The US accounts for about a quarter of world consumption of oil, the UAE's main export.

In addition, the euro-zone debt problems have reduced the attractiveness of the euro as a potential alternative to the greenback as a currency peg.

* additional reporting by Ola Salem