[misterno]

Saudi Arabia has over $680BN in their reserve all invested in US Treasuries.

Now they are selling bonds which means they have to pay interest on debt. Since the interest rate on this debt can not be lower or equal to US treasury rate, then that means they will be paying more interest on debt than the interest they receive from their reserve.

Why would they want to do that? This does not make sense.

[Cog]

Because the last guy standing wins. Saudi intends to be that guy.

[zoidberg]

Because liquidating a reserve can cost more than a cheap low interest bond. Opportunity cost.

[misterno]

Because liquidating a reserve can cost more than a cheap low interest bond. Opportunity cost.

How can liquidating US Treasuries be costing more than paying more interest for your debt?

I am sorry I don't understand. US Treasuries are very liquid and very easy to sell and buy.

Can you elaborate? What do you mean by opportunity cost here?

[GoghGoner]

http://www.wsj.com/articles/saudi-arabia-issues-bonds-worth-5-billion-to-plug-budget-shortfall-1439305126

Analysts at London-based Capital Economics said the bond issuances are a sign of Saudi Arabia’s willingness to widen its domestic capital market. In June, Saudi Arabia for the first time opened its stock market to direct foreign investments.

“A deeper government bond market would provide investors with a greater choice of assets to hold in their portfolios,” said Capital’s William Jackson. “And it would allow the development of a yield curve, allowing for the more efficient pricing of private-sector debt,” he added.

[Outcast_Searcher]

:shock: Saudi Arabia has over $680BN in their reserve all invested in US Treasuries.

Now they are selling bonds which means they have to pay interest on debt. Since the interest rate on this debt can not be lower or equal to US treasury rate, then that means they will be paying more interest on debt than the interest they receive from their reserve.

Why would they want to do that? This does not make sense.

Well, it's not clear to me that they must pay a higher rate.

1). In the article I found which stated details, the tranches are 5, 7, and 10 year "bonds".

2). I'm not finding numbers anywhere CLOSE to the $680 billion number you give on ustreasury.gov, where it is documented. For a whole group of oil exporters (15 countries), I'm seeing well under half of that as of May, 2015 (the last month they give).

http://www.treasury.gov/ticdata/Publish/mfhhis01.txt

3). If they are holding long term debt (treasury.gov says 90% of the debt in total held by such countries is longer term) -- then they might be paying LESS if they're issuing (for example) 5 year notes and holding 25ish year bonds.

4). They might be doing it for liquidity reasons. IF they plan on continuing to sell cheap oil in massive quantities at prices causing massive budget deficits for years -- they may well want such liquidity.

These are just off the top of my head -- such situations are seldomly trivial, given the complex (and not fully disclosed) long term financial strategies such countries might be using. The only thing we can be sure of is that they will PERCEIVE that what they are doing is in their own best interest.

[dinopello]

Apple Corp has over 170 Billion in cash reserves yet just took our a loan for 7 billion to buy back shares. It had to do with taxes and probably other stuff. If I had billions I'd probably do something similar.

[zoidberg]

Because liquidating a reserve can cost more than a cheap low interest bond. Opportunity cost.

How can liquidating US Treasuries be costing more than paying more interest for your debt?

I am sorry I don't understand. US Treasuries are very liquid and very easy to sell and buy.

Can you elaborate? What do you mean by opportunity cost here?

I was thinking that much of their reserves might be in higher yielding instruments like corporate bonds or equities or couldn't be liquidated quickly without damaging smaller markets like gold. Bonds can be raised quickly however at reasonable rates.

Also it's good to keep savings as oppoosed to never going into debt especially if your thinking things might go really bad. Credit can disappear and be defaulted on. Spend your savings and that's it it's gone.

[misterno]

:shock: Saudi Arabia has over $680BN in their reserve all invested in US Treasuries.

Now they are selling bonds which means they have to pay interest on debt. Since the interest rate on this debt can not be lower or equal to US treasury rate, then that means they will be paying more interest on debt than the interest they receive from their reserve.

Why would they want to do that? This does not make sense.

Well, it's not clear to me that they must pay a higher rate.

1). In the article I found which stated details, the tranches are 5, 7, and 10 year "bonds".

I understand but this does not address my question.

2). I'm not finding numbers anywhere CLOSE to the $680 billion number you give on ustreasury.gov, where it is documented. For a whole group of oil exporters (15 countries), I'm seeing well under half of that as of May, 2015 (the last month they give).

http://www.treasury.gov/ticdata/Publish/mfhhis01.txt

Here it is

http://www.bloomberg.com/news/articles/ ... 72-billion

3). If they are holding long term debt (treasury.gov says 90% of the debt in total held by such countries is longer term) -- then they might be paying LESS if they're issuing (for example) 5 year notes and holding 25ish year bonds.

Saudi reserves are all invested in US treasuries and bonds it is not actively managed. Having said that, if Saudi Central Bank wants to liquidate some of its holdings to pay for spending instead of issuing bonds, yes there is a risk of selling bonds at a discount depending on the trading.

but;

even though they lose some, even you add this into the equation, the interest that they will pay on their bonds will CERTAINLY be higher than US Treasury's interest rate. Nobody has a better credit rating than USA. Do you see the dilemma here?

4). They might be doing it for liquidity reasons. IF they plan on continuing to sell cheap oil in massive quantities at prices causing massive budget deficits for years -- they may well want such liquidity.

I agree but this is a separate issue.

These are just off the top of my head -- such situations are seldomly trivial, given the complex (and not fully disclosed) long term financial strategies such countries might be using. The only thing we can be sure of is that they will PERCEIVE that what they are doing is in their own best interest.

Lastly, the only thing that comes to my mind is maybe they did not want to disturb the US bond market? I am not sure if what they would want to sell in the bond market would hit US bond market bad or not just a guess.

Other than that, with all due respect to your approach, I am still not understanding.

[misterno]

Apple Corp has over 170 Billion in cash reserves yet just took our a loan for 7 billion to buy back shares. It had to do with taxes and probably other stuff. If I had billions I'd probably do something similar.

I think this has to do with taxes

But from SA's perspective there is no tax issue AFAIK.

[misterno]

Because liquidating a reserve can cost more than a cheap low interest bond. Opportunity cost.

How can liquidating US Treasuries be costing more than paying more interest for your debt?

I am sorry I don't understand. US Treasuries are very liquid and very easy to sell and buy.

Can you elaborate? What do you mean by opportunity cost here?

I was thinking that much of their reserves might be in higher yielding instruments like corporate bonds or equities or couldn't be liquidated quickly without damaging smaller markets like gold. Bonds can be raised quickly however at reasonable rates.

All SA's reserves are invested in US treasuries

Also it's good to keep savings as oppoosed to never going into debt especially if your thinking things might go really bad. Credit can disappear and be defaulted on. Spend your savings and that's it it's gone.

Yeah, this can be true.

Maybe it is a combination of small things that we can not fully understand now. But mathematically something is off.

[americandream]

:shock: Saudi Arabia has over $680BN in their reserve all invested in US Treasuries.

Now they are selling bonds which means they have to pay interest on debt. Since the interest rate on this debt can not be lower or equal to US treasury rate, then that means they will be paying more interest on debt than the interest they receive from their reserve.

Why would they want to do that? This does not make sense.

Forwarding value is indicative of maturing capitalist practices. They recognise that they have value in the ground which if forwardised can be used today rather than tomorrow.

This is the start of the Reformation in the Arab Empire I have long spoken of. Once the Abrahamic rules on usury are compromised, a more practical approach to economics follows. Just another aspect of globalisation and one that the markets will love.

[kublikhan]

All SA's reserves are invested in US treasuries

No, It's not just US treasuries. They also keep some of their reserves in cash, some reserves in non dollar assets or currencies, other asset classes(ex: equities), etc. Total oil exporters own less than $300 billion in US treasuries. Even assuming the lion's share of that is Saudi Arabia, that still means less than half of Saudi Arabia's reserves are US Treasuries.

Saudi Arabia's central bank will keep its current strategy for managing the country's foreign reserves. The central bank is believed to have placed over half of that amount in conservative U.S. dollar assets such as U.S. Treasury bonds and bank accounts. "We continue to have a balanced allocation of our assets, whether currencies, geographic and other classes."

Saudis to keep reserve management strategy

Over $100 billion of their reserves is just cash. Over 90% of their reserve drawn down has been withdrawing cash. Less than 10% has been selling investments:

The February data showed the central bank had $540 billion invested in foreign securities, about $2 billion less than in January, and $108 billion of deposits with banks abroad, down $21 billion. That implies the central bank has been focusing on bank deposit withdrawals rather then selling U.S. Treasuries.

Saudi drawing down FX reserves to cover deficit, data suggests

A fifth of their portfolio is in non dollar currencies. And of the remaining share that is in dollars, a quarter of it is invested in equities. And of the remaining share that is invested in bonds, not all of it is US treasury bonds. Some of it is higher risk bonds.

recent estimates suggest that roughly 25% of [Saudi Arabia's] portfolio has been invested in equities.

Portfolio composition
We have also tried to estimate the portfolio composition of the funds –both their equity/bond/ alternatives split and their currency composition. Norway provides a rough benchmark for the performance of a conservatively managed fund with a relatively large exposure to euro and pound denominated bonds and the European equity market that can be compared against the Gulf funds, which likely have less euro exposure but more exposure to equities/ alternatives.
Saudi Arabian Monetary Agency non dollar share of assets: 20%
Bonds still dominate SAMA’s[Saudi Arabian Monetary Agency] portfolio but as much as 25% might be in equities. SAMA also has higher risk bonds than that of a traditional central bank portfolio.

The Management of GCC Official Foreign Assets

If I was just to make some ballpark guesses on the composition of that $680 billion, it might look something like this:
$265 billion in US bonds(mostly treasuries)
$170 billion in equities
$135 billion in non dollar assets
$110 billion in cash

[americandream]

SAs assets will be subject to the same prudential rules as any other asset pool. What is different here is their use of usury....clearly they realise that not forwardising this value is just plain old stupid.

[misterno]

SAs assets will be subject to the same prudential rules as any other asset pool. What is different here is their use of usury....clearly they realise that not forwardising this value is just plain old stupid.

What do you mean by forwardising?

[Cog]

SAs assets will be subject to the same prudential rules as any other asset pool. What is different here is their use of usury....clearly they realise that not forwardising this value is just plain old stupid.

What do you mean by forwardising?

I doubt he even knows what it means. It is a word he made up in this 2013 thread.

what-keeps-us-coming-back-to-peakoil-com-t68862-20.html

[americandream]

Securitisation is a form of forwardising. In essence, value that is latent in an asset on a forwards basis, for example the resale value of a house or in this instance, oil in the ground, is parcelled into intangible assets brought forwards such as tradeable shares or debt instruments and exchanged for value. Or to make it easier, money that can only be spent tomorrow is brought backwards in time (or the owner is taken forwards in time) to be used immediately.

It is an accounting term and was the basis of much of the securitisation work I did as a tax lawyer.

[Outcast_Searcher]

2). I'm not finding numbers anywhere CLOSE to the $680 billion number you give on ustreasury.gov, where it is documented. For a whole group of oil exporters (15 countries), I'm seeing well under half of that as of May, 2015 (the last month they give).

http://www.treasury.gov/ticdata/Publish/mfhhis01.txt

Here it is

http://www.bloomberg.com/news/articles/ ... 72-billion

Other than that, with all due respect to your approach, I am still not understanding.

misterno, thanks for your thoughtful, data driven approach instead of the often used "attack mode", on this site.

Where I'm confused is I don't see the reference in your cited Bloomberg article to show that the SA reserves are all in the US, much less all in treasuries. It does show $672 billion in TOTAL SA reserves. So, if SA is diversifying its reserves in anything approaching a prudent manner, this would seem to agree with my treasury.gov link showing that the TOTAL of 15 major oil producers' (including SA) US treasury investments come to less than half of the $680 billion figure cited.

I just try to look at data, to try to separate logic from the (often) used emotional hyperbole we see on this site (and NO, I'm not talking about you). In this case, I see a big mismatch, and don't know what figures to trust.

(I'm having trouble finding reliable data for a definitive explanation of what Saudia Arabia's financial reserves overall composition is).

[americandream]

The takeaway from this is not that SA are being prudent...they will use one of the big 4s and it is a given that their mix will be duly diligent. What is remarkable is the issue of usury instruments.

[americandream]

Incidentally, good find misterno. This is pretty epic stuff. I could do with you as my news provider.