Saudi Arabia Petrodollars reponsible for low Treasury yields

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Submitted by powayseller on August 13, 2006 - 4:40pm

Brad Setser of RGE (Roubini Global Economics) has been wondering what the oil countries are doing with all the extra dollars they are getting the past two years as oil prices have shot up. Nothing shows up in the Federal Flow of Funds report, but surprisingly, UK purchases have increased a lot. If you look at the Treasury report, you'll notice that each country's monthly Treasury purchases vary only a few percent from month to month. The only one that stands out: UK.

May 2006 - June 2005 (recent to last), Treasury securities in billions of dollars
United Kingdom 174.7 166.8 179.1 162.3 157.2 146.0 135.5 100.3 95.8 87.2 73.2 58.8

"If the Saudis buy US debt through a custodial account at a UK bank, it shows up as the purchase of US debt by a private buyer in the UK. The US keeps on churning out debt that the Gulf states (and the People's Bank of China) buy. They buy it through London, just to confuse everyone. And to allow a few analysts who haven't figured this all out to argue that the US really finances its deficits by selling to private investors." - Setser

This recycling of dollars will keep increasing international demand for US debt. As long as oil prices remain high, the Saudis buy Treasuries, keeping the yields low.

"The oil savings glut has supported housing and debt-centric growth in the US. The associated financial flows were well-hidden, but they still left a few traces. The oil savings glut looks set to get bigger in 2006. And it may - or may not - support continued strong US growth." - Setser

Very interesting, and great analysis.