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

Australian funds have begun reducing their holdings of U.S. Treasury bonds due to concerns over the policy risks posed by President Donald Trump's tariff and tax plans. Funds SA, a government-owned fund managing approximately 300 billion dollars in assets, has lowered its holdings of U.S. sovereign debt to underweight levels. Similarly, the Queensland Investment Corporation, which manages 860 billion dollars in assets and is operated by the government, has indicated that some of its client funds are decreasing their investments in U.S. Treasury bonds.

The chief investment officer of Funds SA highlighted that the uncertainty surrounding U.S. fiscal policy and the current yield on U.S. Treasury bonds, which does not adequately reflect the risks associated with holding them, has diminished their appeal. The fund has reduced its holdings of U.S. Treasury bonds by a few percentage points compared to its original target allocation. This shift in strategy by Australian investors underscores the growing unease with Trump's attempts to reshape global trade and the U.S. economy, which are eroding support for past "American exceptionalism" transactions.

Funds SA has utilized its lighter position in U.S. Treasury bonds to allocate funds 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 noted that the dollar would be the first to feel the impact, and if fiscal conditions deteriorate, the U.S. Treasury yield curve would steepen. The fund aims to slightly increase its Australian dollar holdings and maintain more non-dollar currency exposures.

The "Liberation Day" tariffs announced by Trump in April have quickly sparked global concerns about accelerating U.S. inflation and slowing economic growth. Trump has also been pushing for congressional legislation on a tax and spending bill, which analysts predict will increase the U.S. deficit by tens of billions of dollars over the next decade.

The Queensland Investment Corporation, based in Brisbane, manages funds for some of Australia's largest pension funds. The company has expressed that the uncertainty surrounding U.S. policy and fiscal trajectory means that U.S. assets, such as Treasury bonds, will require a higher risk premium compared to the past. The head of the liquid markets group stated that recent developments have led investors to reconsider their allocations to the U.S. market, both in fixed income and currency aspects. While portfolio changes may take several months to fully materialize, depending on the schedule of investment committee meetings, the current discussions indicate that it is only a matter of time before these changes occur. Investors are considering increasing their holdings of government bonds from Australia, Europe, and Japan.

In addition to concerns over the U.S. government's increased borrowing needs, the "capital tax" provision in Trump's "Big and Beautiful" bill is causing anxiety among Australian institutional investors. If approved by Congress, this provision would allow the U.S. to impose additional taxes on companies and investors from countries deemed to have punitive tax policies. This could potentially affect Australian pension funds, which typically have significant exposure to the U.S. market through stocks, fixed income, and private market assets.

One of Australia's largest asset management companies has frozen new long-term investments in the U.S. due to this legislation. The Future Fund, Australia's sovereign wealth fund, has also stated that the U.S. has become a more uncertain investment destination, requiring a higher risk premium. Over the past three months, the dollar has weakened against all other G10 currencies. The head of the liquid markets group suggested that if clients have significant dollar allocations in their investment portfolios or currency hedging baskets, diversifying into other, more protective currencies would be a prudent move.