As US debt surpasses $40 trillion, Gulf investors are looking beyond the record figure to the broader implications of Treasury yields for capital flows, financing costs and investment strategies. US assets and the dollar remain central to Gulf portfolios because of the depth of American markets and Gulf currencies’ links to the dollar. At the same time, higher yields are creating opportunities for Gulf sovereign wealth funds to rebalance portfolios and generate stronger returns on new investments. Economists say the Gulf’s strong financial positions give the region considerable flexibility in navigating shifts in global interest rates. Higher fixed-income yields are also encouraging more diversified strategies spanning bonds, private credit, infrastructure and global equities, alongside growth sectors, such as technology, artificial intelligence and new energy. Dollar remains central Abdullah Almeer, assistant professor of economics at King Fahd University of Petroleum and Minerals (KFUPM), said US debt reaching $40 trillion does not pose an “immediate risk” to Gulf dollar-denominated investments, although it increases longer-term structural risks monitored by sovereign wealth funds and central banks. Almeer told Asharq Al-Awsat that Saudi Arabia holds about $142 billion in US Treasury securities, while the dollar accounts for roughly 57% of global central bank reserves, underscoring its continued central role in the international financial system. The doubling of US debt from about $20 trillion in 2016 to more than $40 trillion today warrants closer scrutiny of fiscal developments, but does not, for the foreseeable future, diminish the attractiveness of US markets or the dollar’s importance to Gulf economies, he argued. US dollar bills are seen in front of displayed stock graph in this illustration taken, February 8, 2021. (Reuters) Higher yields, new opportunities Persistently high US bond yields could reduce the market value of existing securities and result in valuation losses for some Gulf portfolios. Almeer does not, however, expect the US economy to default, stressing that American markets retain high levels of liquidity, depth and institutional stability. A large-scale Gulf exit from US assets is therefore unlikely in the foreseeable future. The main transmission channel to Gulf economies is interest rates. Financing government debt exceeding $40 trillion requires massive Treasury issuance, potentially pushing yields higher, particularly if inflationary pressures persist or oil prices rise. Saudi Arabia’s riyal peg of SAR 3.75 to the dollar also means its monetary policy is closely tied to US interest rates. A widening rate differential between the two countries could put pressure on the exchange rate and capital flows. Almeer estimated Gulf financial reserves at about $874 billion, while sovereign wealth fund assets are approaching $5 trillion, giving the region substantial capacity to finance projects and continue attracting investment. Broader diversification Rising US debt could encourage Gulf states to further diversify investments toward emerging economies such as India, China and Türkiye, as well as real assets, global infrastructure and fast-growing Asian markets, he added. Technology, AI and clean energy could also attract a larger share of investment, in line with economic and investment shifts taking place across the region and globally. Debt figure is not the whole story Almeer stressed that the $40 trillion threshold does not in itself represent a decisive turning point for the global financial system. Markets focus less on the absolute size of debt than on a country’s ability to finance and service it and maintain investor confidence. The US still has the world’s largest economy and financial market, while the dollar remains the most widely used currency in international trade and reserves, giving Washington flexibility unavailable to most other economies, he noted. What makes the figure significant is the accelerating pace of government borrowing and the rising cost of servicing that debt, particularly with interest rates remaining relatively high, he explained. Economic history also suggests that absolute debt levels are not necessarily the decisive factor in determining crisis risk. Japan, for example, has managed debt exceeding 200% of GDP for extended periods without suffering a sovereign debt crisis, Almeer went on to say. A Saudi money changer displays Saudi Riyal banknotes at a currency exchange shop in Riyadh, Saudi Arabia July 27, 2017. (Reuters) Pace of debt growth matters Mohammed Al-Farraj, Head of Asset Management at Arbah Capital, told Asharq Al-Awsat that the $40 trillion figure should be assessed alongside the pace of debt growth, servicing costs, the annual deficit and markets’ capacity to absorb US Treasury issuance. He explained that the trajectory does not necessarily signal an imminent threat to Washington’s ability to meet its obligations, but it is reshaping the global investment environment by raising financing costs and altering returns across asset classes. Higher Treasury yields can reduce the market value of existing bonds while offering better returns on new issues, creating opportunities for investors to rebuild fixed-income portfolios at more attractive levels, he added. Al-Farraj said the current environment could encourage Gulf sovereign wealth funds to strike a better balance between fixed-income instruments and higher-growth assets, with opportunities in gold, global equities, private credit and infrastructure, alongside more flexible management of US Treasury maturities. That does not mean abandoning the dollar, but rather adopting more diversified portfolio management while keeping dollar assets at the core of Gulf investment strategies, he remarked. The main effect of record US debt on the Gulf may therefore be to accelerate the evolution of investment strategies rather than change their direction. The dollar remains pivotal, even as opportunities for Gulf capital expand across bonds, US markets, infrastructure, technology and fast-growing Asian economies.
