Australian Investors Cut U.S. Treasury Holdings Amid Trump Policy Concerns

Australian institutional investors have started to reduce their holdings of U.S. Treasuries due to concerns over the policy risks associated with the Trump administration. The primary reasons for this shift include the administration's tariff policies and tax plans, which have raised significant worries among Australian investors. These policies have the potential to disrupt global supply chains, increase business costs, and affect the profitability of investments in the U.S.

One of the key concerns is the administration's tax plans, which include provisions for a "capital tax." This tax could increase the cost of capital for businesses, making it more difficult for them to invest and grow. The uncertainty surrounding these policies has made it challenging for investors to make long-term investment decisions, leading some to reduce their exposure to U.S. assets.

For instance, the Australian national fund SA, which manages approximately 300 billion dollars in assets, has reduced its holdings of U.S. sovereign debt to a low configuration level. Similarly, the Queensland Investment Corporation (QIC), which manages 860 billion dollars in assets, has also indicated that some of its client funds are decreasing their investments in U.S. Treasuries. The chief investment officer of SA noted that the uncertainty in U.S. fiscal policy and the current yield on U.S. Treasuries, which does not adequately reflect the risks involved, has diminished the attractiveness of these securities.

The shift by Australian investors is part of a broader trend among global investors who are reassessing their exposure to U.S. assets due to the Trump administration's policies. This trend is not limited to Australia; other major Asian investors, including Japan's largest life insurance company and some of Asia's largest family offices, have also been seeking alternatives to U.S. Treasuries or freezing their investments in the U.S.

In response to these concerns, SA has redirected funds from its relatively light position in U.S. Treasuries towards investment-grade and high-yield credit assets in the U.S. The fund also plans to reduce its overall dollar risk exposure. The chief investment officer of SA highlighted that the dollar is likely to be the first to feel the impact, and if the fiscal situation worsens, the U.S. Treasury yield curve could steepen. The fund aims to slightly increase its Australian dollar holdings and maintain more non-U.S. currency exposures.

The administration's "liberation day" reciprocal tariffs, announced in April, have quickly raised global concerns about accelerating U.S. inflation and slowing economic growth. Additionally, the administration has been pushing for a tax and spending bill that analysts predict will increase the U.S. deficit by tens of billions of dollars over the next decade. These policies have further heightened the uncertainty surrounding U.S. assets, leading investors to seek higher risk premiums for investments in the U.S.

QIC, which manages funds for some of Australia's largest retirement funds, has also expressed concerns about the uncertainty in U.S. policy and fiscal trajectory. The company's head of liquid markets noted that recent developments have led investors to reconsider their allocations to the U.S. market, both in fixed income and currency. While changes to investment portfolios may take several months to fully materialize, the current discussions indicate that a shift is inevitable. Investors are considering increasing their holdings of government bonds from Australia, Europe, and Japan.

In addition to the concerns about higher borrowing needs by the U.S. government, the "capital tax" provision in the Trump administration's "Big and Beautiful" bill has raised further worries among Australian institutional investors. This provision, if approved by Congress, would allow the U.S. to impose additional taxes on companies and investors from countries deemed to have punitive tax policies. This could significantly impact Australian pension funds, which typically have substantial exposure to the U.S. market through equities, fixed income, and private market assets.

One of Australia's largest asset management companies has already frozen new long-term investments in the U.S. due to this provision. The Australian sovereign wealth fund, Future Fund, has also stated that the U.S. has become a more uncertain investment destination, requiring a higher risk premium. Given the recent weakness of the dollar against all other G10 currencies, QIC's head of liquid markets advised that diversifying investments into other, more protective currencies would be a prudent move for clients with significant dollar allocations in their portfolios or currency hedging baskets.