The Hong Kong Investment Funds Association has raised managers’ concerns to the Mandatory Provident Fund Schemes Authority and the Financial Services and the Treasury Bureau, said the people, asking not to be named because the information is private. The association recommended that authorities make an exception for US Treasuries, by allowing funds to invest in the assets even if they are rated one notch below AAA, the people said.
The situation underscores the risks of the US falling foul of the unusually strict investment mandates governed by Hong Kong laws. The bulk of global investors do not require the top-tier rating to invest freely in US Treasuries — a factor which minimises the risk of forced sales.
MPF bond funds and mixed asset funds that could have US Treasuries exposure stood at HK$484 billion as of the end of 2024. A spokesperson at the Mandatory Provident Fund Schemes Authority, which regulates Hong Kong’s pension system, confirmed that under its requirements the US still has the highest credit rating from one approved firm and qualifies for special treatment.
The FSTB and MPFA “will continue to closely monitor the latest market developments and take appropriate actions to safeguard the interest of MPF scheme members as and when necessary,” an FSTB spokesperson said. HKIFA didn’t respond to requests for comment.
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For now, Japan’s R&I said it is not considering a downgrade for US Treasuries.
“Since we affirmed the AAA rating with a stable outlook in February, our basic view is that we will maintain the current rating,” said Kazuki Hara, chief analyst at R&I. “We don’t believe the situation described there has significantly changed.”
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US long-dated bonds slipped after Bloomberg reported the risk of forced sales, with the 30-year yield erasing declines to trade around 4.95% as of 9:09 a.m. in New York. The 10-year rate was three basis points higher at 4.48%.
Moody’s downgrade
MPF funds are only allowed to invest over 10% of portfolios in a single issuer if they are an exempt authority. The designation applies to any government with a top rating from an approved agency, as well as to a specific list of issuers that includes the Hong Kong and Chinese governments.
Unlike these Hong Kong funds, global holders of Treasuries generally don’t rely on the US maintaining a certain credit rating. A recent survey conducted by Bloomberg Intelligence of more than a dozen fixed-income mandates for large mutual funds and separately managed accounts showed that Treasuries were their own asset class without any rating stipulation.
US long-dated debt initially sold off on Monday in response to the Moody’s downgrade, but the moves eased throughout the day. After Fitch downgraded the US in 2023, Moody’s and R&I were the last remaining AAA or equivalent ratings recognized by Hong Kong officials.
Introduced in 2000 to prepare for a rapidly aging population, the MPF mandates participation for most employees in the city. It has about 4.7 million contributing members, with various financial institutions managing funds under the retirement saving system.
