Bloomberg reported citing sources that after Moody’s downgraded the U.S. credit rating, Hong Kong fund managers warned of risks that their holdings of U.S. Treasury bonds might face forced selling. Under Hong Kong’s Mandatory Provident Fund (MPF) system, funds with a total asset size of HK$1.3 trillion (approximately US$166 billion) can only invest more than 10% of their assets in U.S. Treasuries if the U.S. has a AAA or equivalent rating from an approved ratings agency.
Meanwhile, open interest data from the Chicago Mercantile Exchange (CME) showed large-scale options trades betting that the 10-year U.S. Treasury yield will rise to 5% in the coming weeks, with a notional value of up to US$11 million. According to a JPMorgan client survey, short positions on U.S. Treasuries have climbed to their highest level since February 10.
As of the reporter’s deadline for Securities Times China, the three major U.S. stock index futures continued to decline, with Nasdaq futures falling more than 1%, Dow futures down nearly 1%, and S&P 500 futures dropping 0.9%.
The Threat of a HK$480 Billion Sell-Off?
Under Hong Kong’s MPF system, funds are only permitted to invest more than 10% of their assets in U.S. Treasuries if the U.S. holds a AAA or equivalent rating from an approved agency. After Moody’s downgraded the U.S. rating last week, only Japan’s “Rating and Investment Information Inc. (R&I)” still maintains the AAA rating for the U.S.
Sources said the Hong Kong Investment Funds Association (HKIFA) has conveyed fund managers’ concerns to the MPF Authority and the Financial Services and the Treasury Bureau (FSTB). The association has reportedly recommended that authorities make an exception for U.S. Treasuries, allowing funds to continue investing in them even if their rating falls below AAA. HKIFA has raised fund managers’ concerns with the MPF Authority and FSTB, proposing special treatment for U.S. Treasuries.
This situation highlights risks that the U.S. may face due to violating Hong Kong’s unusually strict investment rules. Most global investors do not require the highest ratings for U.S. Treasuries, reducing the risk of forced selling.
As of the end of 2024, the total assets of MPF bond funds and mixed-asset funds potentially holding U.S. Treasuries amounted to HK$484 billion. A spokesperson for the MPF Authority, which regulates Hong Kong’s pension system, confirmed that under its rules, the U.S. still receives the highest credit rating from one of the approved agencies, thus remaining eligible for special treatment.
Spokespersons for FSTB and the MPF Authority said both agencies will continue to closely monitor the latest market developments and take appropriate actions if necessary to protect the interests of MPF scheme members. HKIFA did not respond to inquiries.
Unlike S&P and Fitch, which criticized the U.S. for its last-minute debt ceiling deal, Moody’s downgraded the U.S. debt rating on May 16 due to the decline in the U.S.’s debt-servicing capacity caused by rising Treasury yields since 2021, and the potential exacerbation of deficit pressures if Trump’s tax-cut bill passes Congress. Moody’s projected that the U.S. federal deficit will expand to nearly 9% of GDP by 2035, up from 6.4% in 2024. After Moody’s downgrade, the U.S. lost its AAA sovereign debt rating from all three major rating agencies.
Surge in Short Positions
Traders are heavily betting that long-term U.S. Treasury yields will surge due to concerns over the U.S. government’s growing debt and deficits, a situation made more perilous by Trump’s tax-cut plans, Bloomberg reported. Wall Street strategists from firms including Goldman Sachs and JPMorgan are raising their yield forecasts, with the largest positions betting on the 10-year yield reaching 5%. But how severe is the selling pressure on U.S. Treasuries?
According to CITIC Securities, historical performance shows that sovereign rating downgrades have a more significant short-term negative impact on U.S. stocks, lasting about 1-2 weeks. The impact on long-term Treasury yields has been more transient, with no obvious sustained increase in both past cases. This may be because the downgrades occurred after the resolution of U.S. debt crises, and after each downgrade, safe-haven demand pushed funds into the Treasury market, actually causing yields to decline to some extent.
Unlike the previous two rating downgrades that occurred after the resolution of the debt – ceiling crisis, the background of this downgrade is the continuous advancement of the Trump tax – cut bill and the high – level persistence of the US policy interest rate. On May 18, the House Budget Committee passed the Trump tax – cut bill. If the bill is signed into law, it will further deteriorate the fiscal situation of the United States, intensify market concerns about the fiscal deficit, and thus promote a significant upward movement of the long – term US Treasury bond interest rate after the market opened on May 19. However, on the same day, members of the US government and Federal Reserve officials made intensive statements to stabilize market sentiment, and the US Treasury bond interest rate peaked and then declined. Although the fluctuations triggered by the current rating downgrade have subsided, in the future, we still need to be vigilant against the risks of fluctuations in the long – term US Treasury bond interest rate caused by the tax – cut bill, tariff policies, and fluctuations in the US economy.
