Hong Kong’s pension fund managers are sounding the alarm of potential forced selling on their Treasury holdings after a downgrade by Moody’s Ratings of US debt, according to people familiar with the matter.
Funds operating under the city’s HK$1.3 trillion ($215.12 billion) Mandatory Provident Fund system are only allowed to invest over 10% of their assets in Treasuries if the US has a AAA or equivalent rating from an approved agency. After last week’s cut by Moody’s, the only remaining such score is from Japan’s Rating & Investment Information Inc.
The Hong Kong Investment Funds Association has flagged the risks and the 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.
US long bonds slipped after the report, with the yield on 30-year notes briefly erasing declines to trade around 4.90%.
The delicate situation underscores the risks of the US falling foul of the unusually strict investment mandates governed by Hong Kong laws. Bond funds and mixed asset funds that could have US Treasuries exposure stood at HK$484 billion as of the end of 2024, according to the latest quarterly report from the MPFA.
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 authority said it “will closely monitor the latest market developments and take appropriate actions to safeguard the interest of MPF scheme members as and when necessary.”
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The FSTB couldn’t immediately respond to comment. HKIFA didn’t respond to requests for comment.
For now, Japan’s R&I said it is not considering a downgrade for US Treasuries.
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“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.”
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, the bulk of global investors doesn’t require the top-tier rating to invest freely in US Treasuries — a factor which minimises the risk of forced sales, analysts said. 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 recognised by Hong Kong officials.
Introduced in 2000 to prepare for a rapidly ageing 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.
