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Oil-Producing Nations >>very pertinent article
Buy Up U.S. Securities

By CRAIG KARMIN and AARON LUCCHETTI
Staff Reporters of THE WALL STREET JOURNAL
December 13, 2004; Page C1

At a time of growing concern that Asian central banks and other overseas investors are losing their appetite for U.S. securities, rising demand, particularly for bonds, is coming from an unexpected source: oil-producing nations.

The 16 major oil-exporting countries -- including Middle Eastern nations, Russia, Mexico and Venezuela -- are net buyers of $50 billion in U.S. bonds and stocks this year through September, according to the latest figures from the U.S. Treasury Department. That number has more than quadrupled from the same period last year, and there is evidence that these investors are stepping up their purchases of some U.S. securities even as they diversify into other markets.

While oil-exporting nations have received less attention for their role as investors, collectively the total value of their purchases of U.S. securities this year is more than twice that of China. The 16 countries represent just more than 7% of the total investment flowing into the U.S. market, the largest share these nations have had since the Treasury began breaking down this data in 1996. Even after a bit of a falloff in foreign buying in the third quarter, demand still looks healthy.

"The oil producers have been significant buyers this year and have helped offset declining demand from China," says Joseph Quinlan, chief market strategist for Banc of America Capital Management.

These purchases have helped support the U.S. market and the economy, because most of the money has gone into bonds and thus helped to drive down interest rates. This year, foreign investors are on pace to pour more than $900 billion into various types of U.S. bonds, while they are trimming their holdings of U.S. stocks for the first time in years.

In oil regions there are signs that some producers are diversifying out of the U.S., putting more money into Europe. But because these nations are so flush with oil cash, U.S. coffers still are benefiting from a smaller piece of an expanding investment pie, Mr. Quinlan says.

Indeed, eight Middle Eastern nations -- including Saudi Arabia, Iran and Kuwait -- have been net buyers of about $15 billion of U.S. securities through September. That compares with net sales of U.S. securities by those nations in 2002 and 2003. But the biggest buyer among oil producers by far is Mexico, with nearly $21 billion in net purchases, nearly double the amount over the period last year.

The flow of funds from these nations illustrates just how deep the bench is for the U.S. bond market. With China's purchases of U.S. securities down almost 50% from the first nine months of last year, increased buying by countries such as Mexico and Russia, among others, has helped support the bond market.

"China and Japan are getting all the spotlight in terms of their purchases of Treasurys, but not far behind them are oil-producing nations," says Alex Li, an interest-rate strategist at Credit Suisse First Boston.

The persistence of foreign demand was on display last week during the auction of $15 billion in five-year U.S. Treasury notes. More than 60% of those notes were sold to so-called indirect bidders, which often are foreign central banks or other foreign investors.

Fears of broader foreign selling in the bond market so far have been unfounded. Through the first three quarters of the year, foreign investors and central banks have bought a net $302 billion in Treasury bonds and notes, $227 billion in corporate bonds and $165 billion in federal-agency bonds and mortgage bonds.

Oil-producing nations especially are attracted to U.S. bonds because they are easy to trade and because they are carrying slightly higher yields than they did in 2003, says Adnan Akant, a managing director at investment firm Fischer Francis Trees & Watts.

Oil producers have been reaching beyond super-safe Treasurys into bonds with higher yields and stocks. Much of the money flowing into the U.S. this year from member nations of the Organization of Petroleum Exporting Countries, for example, has been going to government-agency bonds as opposed to Treasurys.

There is no guarantee that foreigners will continue their purchases at record pace, however. Demand from these oil-producing countries fell sharply in the third quarter, perhaps as these investors began to fret about the weakening dollar, the potential for rising U.S. interest rates or uncertainty before the U.S. presidential election.

"The question today is whether or not the third-quarter downturn in purchases was a blip or the beginning of a trend," says Mr. Quinlan of Banc of America Capital Management. "We lean toward the latter. They're losing money holding dollars if the dollar continues to weaken."

The latest quarterly report from the Bank of International Settlements also has raised some concern that OPEC nations were looking to diversify their holdings away from U.S. assets. The Bank of International Settlements said OPEC countries' dollar-denominated deposits fell even as their investments in euro-based securities rose. The report indicated the rebalancing may have been in response to U.S. interest rates falling below those of Europe over the period, making European bonds more attractive, though that trend recently reversed.