Hong Kong Pension Funds Plan to Sell US Bonds in Case of AAA Downgrade.

Hong Kong's pension funds plan to sell US bonds within three months if the US loses its AAA rating, according to informed sources. This is a response to local regulations that require pension funds to limit their US Treasury holdings to 10% if the US is not rated AAA by a recognized rating agency. The plan is being discussed with the Mandatory Provident Fund Schemes Authority and could involve shifting investments to German and Singaporean government bonds, which are rated AAA.

Hong Kong's pension fund managers are preparing to sell a significant portion of their US Treasury holdings within the next three months if the US loses its AAA rating, according to sources familiar with the matter. This decision is in response to local regulations that mandate pension funds to limit their US Treasury holdings to 10% if the US is not rated AAA by a recognized rating agency [1].

The plan is being discussed with the Mandatory Provident Fund Schemes Authority (MPFSA) and could involve shifting investments to government bonds from Germany and Singapore, both of which are rated AAA by major agencies. The MPFSA has urged pension fund managers to draw up contingency plans in case of a downgrade, and industry groups including the Hong Kong Investment Funds Association and the Hong Kong Trustees’ Association have been discussing the proposal with the regulator [1].

Under the proposed plan, the weighting of US Treasuries in FTSE Russell’s bond index would need to fall considerably if the US is downgraded. US government bonds currently make up the largest portion of the index, at 46.37%, followed by China, France, Japan, and Germany. To avoid breaching the 10% limit, Treasuries would need to be kept at around 9% of the benchmark [1].

Pension fund managers have proposed a three to six-month window to rebalance their positions in the event of a downgrade. Allocations would shift to other sovereign bonds of issuers with AAA ratings and large market values. The MPFSA has asked trustees to develop contingency plans and make "timely and orderly" adjustments to their asset allocations in response to possible market developments [1].

The situation highlights the risks of the US falling foul of Hong Kong's unusually strict investment mandates. While any potential forced sales in Hong Kong are unlikely to materially rock the global market for US Treasuries given its size and liquidity, it's a headache for portfolio managers who must contemplate an overhaul of their investment strategies [1].

References:
[1] https://www.bloomberg.com/news/articles/2025-06-11/hong-kong-pensions-plan-to-cut-treasuries-if-us-loses-aaa-rating