Hong Kong’s Pension Funds Poised to Exit Treasuries if U.S. Loses Final AAA Rating

Regulatory Threshold May Trigger Forced Selling

Under Hong Kong’s investment rules, MPF trustees can allocate more than 10% to U.S. Treasuries only if the U.S. holds an AAA—or equivalent—credit rating from an approved agency. Following Moody’s downgrade last month, Japan’s R&I remains the only qualifying rater. Should R&I cut its rating, funds would face a forced reallocation—likely within a 3–6 month window.

HK$1.3 Trillion in Assets Nearing the Edge

Hong Kong’s MPF system manages over HK$1.3 trillion (≈US$210 billion) across more than 4 million participants. In recent meetings, fund managers indicated readiness to gradually reduce exposure to Treasuries if necessary to stay within the 10% ceiling. This would follow a regulatory directive for timely, orderly contingency planning.

A Global Ripple or a Local Footnote?

Compared to global Treasury volumes, Hong Kong’s potential divestment is relatively minor. Even if a full reallocation were triggered, it would involve US$10–12 billion—modest on a global scale but strategically disruptive for local allocators, particularly given current volatility in long-dated yields.

The Benchmark Problem: FTSE Russell Exposure

The FTSE Russell MPF World Government Bond Index, a primary benchmark, holds a 46% allocation to U.S. Treasuries. A downgrade would force that weighting below 9% to comply with the regulatory threshold, reshaping both passive and active fund exposures and requiring rebalancing across portfolios.

Where Would Capital Shift?

If Treasuries become non-compliant, likely alternatives include Bunds, Singapore Government Securities, and Australian sovereigns—each with AAA ratings and ample issuance volume. However, surging demand may compress yields across the European sovereign space, tightening spreads further.

Broader Implications of Rules-Based Triggers

This case illustrates the downsides of rigid, rating-based mandates. Rather than risk-based capital frameworks, such rules can generate procyclical pressures. While fund managers have asked for rule revisions, the MPF regulator remains committed to the 10% cap.

A Blow to the “Risk-Free” Status of Treasuries?

Though not systemic on its own, Hong Kong’s prospective selloff underscores the growing perception that U.S. sovereign debt is no longer immune to global re-rating. With the Trump administration’s fiscal expansion, even marginal changes in official-sector demand can move the long end of the curve.

What to Watch

R&I’s next review on U.S. debt

Auction results for 30-year Treasuries

Spread movements in interest rate swaps

Potential policy responses from Washington

Bottom Line

This is not a systemic threat to U.S. debt markets. But it is a regulatory wake-up call. Reliance on external ratings can set off ripple effects across compliant capital pools. In a world where the political and fiscal landscape is increasingly volatile, fund managers can no longer ignore the credit politics of sovereign debt.