Those sales have had a small, but visible impact on America’s funding costs. According to Deutsche Bank AG, selling by foreign central banks since March has added 0.3 percentage point to yields on 10-year Treasuries, which ended Thursday at 2.03 percent.
SAMA’s own figures show reserve assets held in foreign securities have fallen by a record $108 billion in 2015. The Saudi central bank, which doesn’t disclose separate figures for Treasuries, owned $423 billion in overseas securities as of November.
“I come down on the side of thinking there should be more transparency,” said Jeff Caughron, chief operating officer at Baker Group, which advises community banks with more than $45 billion in investments. But at the same time, “the Treasury is constrained by political sensitivities and that comes into conflict with market participants that crave more transparency. It’s an understandable conflict.”
And events in recent months, from President Barack Obama’s landmark nuclear deal with Iran to Saudi Arabia’s execution of a prominent Shiite cleric who challenged the royal family, underscore just how sensitive U.S.-Saudi relations have become. The longstanding rationale for the alliance has also been undercut by America’s domestic oil boom, which has made it far less dependent on Saudi exports.
Whatever the political considerations, some analysts speculate Saudi Arabia may actually be trying to hold onto its Treasuries as part of a strategy to bulk up on dollar assets amid the deepening turmoil in global financial markets.
“You need dollars if you’re an oil producer, you want to make sure you have dollars on your balance sheet,” said Sebastien Galy, Deutsche Bank’s director of foreign-exchange strategy, who suggests SAMA could be raising cash by liquidating riskier investments such as stocks, real estate and private equity. Holding dollars also makes sense as a hedge against the plummeting price of oil, which is priced in the U.S. currency.
Figures from SAMA suggest the kingdom might be reallocating some of its reserves into short-term, liquid assets to help the finance ministry meet budget commitments and defend its 30-year- old currency peg of 3.75 riyals to the dollar.
The central bank has increased foreign currencies and deposits held abroad by 7 percent in the first 11 months of 2015, while at the same time reducing foreign securities, consisting of equities and longer-term debt, by 20 percent.
That cash has become key. Oil’s slump to less than $30 a barrel, from more than $100 two years ago, has eroded the petrodollar-fueled wealth that quadrupled per-capita income since the late 1980s and provided Saudi Arabia with the largess to offer free health care, gasoline subsidies and routine pay increases.
“When SAMA is required to raise liquidity for the Ministry of Finance, you’d see deposits and cash go up and they’d liquidate other assets,” said Khalid Alsweilem, SAMA’s former head of investment. “They know when the Ministry of Finance will spend all their riyals. So they prepare certain amount of cash available based on such expectations.”
Alsweilem, who spent 20 years at SAMA and now advocates for fiscal reforms as a fellow at Harvard University’s John F. Kennedy School of Government, says market watchers may overestimate how much money the central bank actually allocates to Treasuries.
SAMA isn’t a typical central bank because it acts as a quasi-sovereign wealth fund, he said. As such, it aims for higher returns as a buffer against falling oil revenue and invests in a wide array of risky assets, which explains why it has only recently started to become more transparent, Alsweilem said.
To hear Peterson Institute’s Truman tell it, more clarity by central banks is long overdue — particularly when it comes to the U.S. Treasury.
“In the old days at the Treasury and central banks, transparency wasn’t the word of the day” and politics made special treatment a non-issue, he said. Now, “it’s simply a legacy issue. You want to deal with it sooner or later.”