Hong Kong’s pension fund managers have formed a preliminary plan to sell down their Treasury holdings within as soon as three months if the US loses its last recognized top credit rating, according to people familiar with the matter.
Industry groups including the Hong Kong Investment Funds Association and the Hong Kong Trustees’ Association discussed the proposal with the pensions regulator on Wednesday, the people said, asking not to be identified as the meeting was private.
Under local regulations, managers of the city’s HK$1.3 trillion Mandatory Provident Fund system can only invest more than 10% of their funds in Treasuries if the US has a AAA or equivalent rating from an approved agency.
The downgrade of US sovereign debt by Moody’s Ratings last month left Japan’s Rating & Investment Information Inc. as the only remaining approved firm with the highest score. While R&I has said it isn’t considering cutting its US rating, the Mandatory Provident Fund Schemes Authority last month urged pension fund managers to draw up “contingency plans” in case of a downgrade.
London Stock Exchange Group’s FTSE Russell, which runs the MPF World Government Bond Index, a key benchmark that pension fund managers widely use for exposure to Treasuries, formulated an analysis of the divestment plan at the request of the industry groups earlier this month, according to the people.
Ka Shi Lau, chair of Hong Kong Trustees’ Association, said a deck of materials on the potential impacts and analysis was given to the regulator. Lau also confirmed Wednesday’s meeting.
Representatives from the MPF Schemes Authority and FTSE Russell declined to comment. The Hong Kong Investment Funds Association didn’t respond to a request for comment.
The situation highlights the risks of the US falling foul of the unusually strict investment mandates governed by Hong Kong regulations. The bulk of global investors don’t require the top-tier rating to invest freely in US Treasuries, minimizing the risk of forced sales.
While any potential forced sales in Hong Kong are unlikely to materially rock the global market for US Treasuries given its size and liquidity, it’s a headache for portfolio managers who must contemplate an overhaul of their investment strategies. For funds focusing exclusively on government debt, options are limited given the lack of large issuers comparable to the US.
Concerns about demand for long-end Treasuries have caused the yield on 30-year bonds to spike to some of the highest levels since 2023. An auction on Thursday will be closely watched for clues about investor appetite at a time when the Trump administration’s tax-and-spending bill is expected to swell the nation’s debt.
Under the plan, the weighting of Treasuries in FTSE Russell’s bond index would need to fall considerably if R&I downgrades US debt. US government bonds make up the biggest portion at 46.37%, followed by China, France, Japan and Germany. To provide a buffer against market fluctuations, Treasuries would need to be kept at around 9% of the benchmark to avoid breaching the 10% limit, the people said.
Pension fund managers proposed to be given three to six months to rebalance positions in the event of a downgrade, the people said. Allocations would shift to other sovereign bonds of issuers with AAA ratings, and those with large market values, the people added. Germany and Singapore, which are in the FTSE index, are rated AAA by major agencies.
Potential impacts of the reallocation were included in the materials shown to the regulator, the people added. The bond gauge has returned an annualized 1.03% on a hedged basis since inception.
Pension fund managers had earlier asked the authority to reconsider the rule. But the regulator pushed back with its request for trustees to develop contingency plans and make “timely and orderly” adjustments to their asset allocations in response to possible market developments.
The MPF, introduced in 2000, has more than 4 million contributing members, with various financial institutions managing funds under the system.
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