The United Arab Emirates overtook China with its biggest Treasury-buying spree on record in February, one of the worst months for US debt markets in years.
Treasury buying is a short-term financial instrument that is issued by the US Treasury with maturity periods ranging from a few days up to 52 weeks (one year). They are considered among the safest investments since they are backed by the full faith and credit of the United States Government.
When an investor buys a Treasury Bill, they are lending money to the government. The US Government uses the money to fund its debt and pay ongoing expenses such as salaries and military equipment.
OPEC’s third-biggest crude producer raised its stockpile by about $17 billion to $50.6 billion, making it the largest buyer after the UK that month, according to the US Treasury Department data.
Though Abu Dhabi, the UAE capital accounts for almost 6 percent of the world’s oil reserves, may have built up enough of a buffer to commit more if its dollar earnings to the $21 trillion Treasuries market, it came as prices tumbled amid growing expectations of a global economic rebound. US debt dropped 1.8 percent in February, according to data, with the yield on the benchmark 10-year note climbing about 34 basis points, its sharpest increase since November 2016.
“Other than the fact that rates were higher and that is the deepest and most liquid market, I wouldn’t know any other reason” why the government would boost purchases, said Abdul Kadir Hussain, the Dubai-based head of fixed-income asset management at Arqaam Capital.
The move took UAE holdings to levels last seen in 2019 before the global pandemic and the crash in oil prices. China bought $9 billion of Treasuries in February to bring its total to $1.1 trillion, the highest since mid-2019.
Although a recovery in oil has been a boon across the energy-rich Middle East, the unexpected amount of money may be even bigger for the UAE since it needs one of the lowest crude prices to balance its budget. Other top oil exporters in the Persian Gulf, including Saudi Arabia and Kuwait, cut back their Treasury holdings in February.
The official tally
The official tally may not accurately reflect the true size of a country’s holdings if they are held by banks in foreign countries. Like many of its regional peers, the UAE needs to have sufficient reserves to maintain confidence in its currency peg to the dollar.
The International Monetary Fund (IMF) estimates the UAE central bank’s reserves will reach $119 billion this year, in addition to more than $1 trillion in assets managed by the country’s wealth funds.