Decline in U.S. Treasury Appeal, Holdings "Underweight"
As U.S. President Trump adopts more aggressive measures on tariffs, taxes, and spending policies, many large Australian institutional investors are reallocating their portfolios, actively reducing their holdings of U.S. Treasuries.
The Australian state fund SA, managing about $30 billion in assets, stated that its holdings of U.S. Treasuries have been reduced to an "underweight" level. Its Chief Investment Officer, Con Michalakis, frankly mentioned that current U.S. fiscal policies are filled with uncertainty, and Treasury yields fail to compensate for the risks, diminishing their appeal.
Queensland Investment Corporation (QIC) also revealed that assets managed for some clients are gradually decreasing in Treasury allocations, especially with concerns about potentially significant future deficits making the market more cautious.
Reduced Dollar Exposure, Shifting to Other Markets
Michalakis indicated that the SA fund is redirecting funds to U.S. corporate credit assets, particularly investment grade and high-yield bonds, to enhance risk-adjusted returns. The fund also plans to further reduce dollar exposure and moderately increase holdings in the Australian dollar and non-U.S. currency assets.
"If U.S. finances continue to deteriorate, we may see a further steepening of the yield curve," he said, "We prefer allocating funds to local currency assets and other low-risk countries."
Meanwhile, Australia's largest pension fund manager, Future Fund, has also expressed similar concerns, believing that uncertainty in the U.S. market is rising and U.S. Treasuries will require a higher risk premium.
"Capital Tax" Clause Triggering Widespread Anxiety
In addition to the decline in appeal of U.S. Treasuries, a provision in Trump's "Big Beautiful Bill" known as the "Clause 899" or "Capital Tax" is causing significant unease among Australian investors. If passed, the bill would allow the U.S. to levy additional taxes on investors from "tax punitive" countries, undoubtedly impacting long-term investors like Australian pension and sovereign wealth funds.
AMP's Sydney branch head, Stuart Eliot, stated that due to the "Capital Tax" impact, the company has frozen all new long-term investment projects in the U.S. Future Fund has also publicly stated that the U.S. is becoming a more uncertain investment destination.
Investment Direction May Turn to Low-Risk Areas like Europe and Japan
Facing increasingly complex policy uncertainties, Australian funds are considering increasing allocations to Japanese, European, and domestic bond markets. Beverley Morris, head of QIC's liquid markets department, pointed out that although asset reallocation may take months to materialize, the trend is evident.
"From our clients' feedback, regardless of whether it's on fixed income or currency positions, everyone is reassessing their exposure to the U.S.," Morris stated.
Meanwhile, the continuous weakening of the dollar has also increased outflow pressures. The Bloomberg Dollar Index has fallen more than 7% this year, and Australian asset management institutions are accelerating diversification to mitigate potential shocks.
