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High Probability Sovereigns to Hold Treasuries Despite Downgrade

Sovereign wealth funds and other governmental investors will likely continue to hold positions in U.S. treasuries, at least in the short-run. Last Friday, Standard & Poor’s downgraded the United States, while Moody’s and Fitch Ratings affirmed their AAA status for the United States. This downgrade is unlikely to cause any mandatory sell-off of treasuries or massive dump by central banks, governmental pension funds, and sovereign funds since treasuries remain the most liquid asset. At this point in time, the United States is not facing the exact same dilemma that Greece is currently dealing with.

Around the globe, government officials publicly did not state there would be a massive sell off of treasuries from their respective countries.

From a practicality stance, treasuries remain safe as other major Western nations with sovereign debt issues are in similar or worse shape than the United States.

Asian countries are major holders of U.S. treasuries, especially China and Japan. Unlike Japan, in China there is a strong growing consensus from government officials of the need for the United States to curb its addiction on borrowing.

South Korea’s vice finance minister, Yim Jong Yong, told reporters in Gwacheon, “Our faith in U.S. Treasuries has not changed,” after a meeting with counterparts from the central bank and financial agencies.

Major Foreign Holdings of U.S. Treasury Securities in Billions – End of Period

Country May 2011 Apr 2011 Mar 2011 May 2010
China, Mainland 1159.8 1152.5 1144.9 867.7
Japan 912.4 906.9 907.9 784.8
United Kingdom* 346.5 333.0 325.2 350.7
Oil Exporters** 229.8 221.5 222.3 228.6
Brazil 211.4 206.9 193.5 161.5

Source – U.S. Treasury

* Includes Channel Islands and Isle of Man
**Oil exporters include Ecuador, Venezuela, Indonesia, Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, the United Arab Emirates, Algeria, Gabon, Libya, and Nigeria.

With all things being said, many countries with non-commodity sovereign funds have large allocations to treasuries. For central banks, this is a result to prevent the unwanted appreciation in their currency against the U.S. dollar. If their currencies appreciate over the U.S. dollar it would hurt their export competiveness. Already, Japan has indicated they are willing to intervene again after selling currency on August 4th. Asian central banks are not thrilled about the American downgrade, but they are willing to hold out.

Qatar Central Bank Deals with MSCI

MSCI, a stock index company whose benchmarks influence investor behavior, has tremendous indirect power impacting the stock markets of smaller economies. In 1988, MSCI released its emerging markets index, a now-widely-used benchmark for many institutional investors wanting access to growth markets. China and South Korea make up the majority of the benchmark, but smaller economies such as Poland, Chile and even Qatar make up other pieces of it.

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bcIMC Buys into Bottling Business with PAI in €1.623 Billion Takeover of Refresco

Dutch soft-drink bottler Refresco Group N.V. has agreed to a buyout offer for all 81.2 million of its shares from French private equity firm PAI Partners SAS (PAI) and Canadian pension manager British Columbia Investment Management Corporation (bcIMC) in exchange for €20 in cash per ordinary share for a total consideration of €1.623 billion. Refresco’s major shareholders, which includes 3i Group, and shareholding members of its boards, who represent 26.5% of outstanding shares, have said they stand behind the deal.

Refresco’s board rejected an initial offer from PAI in April 2017 of €1.4 billion, which they felt did not adequately capture the value added by their plans to bolster its presence in North America through the acquisition of Canadian bottler Cott TB, a deal that went through in July for US$ 1.25 billion.

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Digital Insurance Distributor BGL Opts for CPPIB Money Over IPO

Canada Pension Plan Investment Board (CPPIB) is investing £675 million (US$ 895.715 million) for a 30% stake in Peterborough-based BGL Group, a digital distributor of insurance and household financial services to 8.5 million customers. [ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]

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