Australia's second-largest pension fund is growing increasingly pessimistic about US Treasuries due to concerns that Washington's policies could trigger inflation. The Australian Retirement Trust (ART), which manages A$330 billion (US$216 billion) in assets, has reduced its US bond holdings through a dynamic asset allocation strategy, according to senior portfolio manager Jimmy Louca in an interview last week.

Louca stated that bonds from other countries, including the UK and Australia, offer better value. He added that despite Federal Reserve Chair Powell's recent dovish pivot, the expansion of the US fiscal deficit and the consequences of Trump's trade wars could intensify inflationary pressures.

Louca, who heads the fund's multi-asset dynamic allocation division, explained: "From a cyclical perspective, the Fed is in an easing cycle, but there are risks on the back end due to fiscal concerns. From a structural standpoint, if the US policy mix involves significantly increased fiscal spending combined with the Fed's greater willingness to maintain full employment, this would be a policy combination more likely to drive inflation higher."

ART's move away from US Treasuries is part of a broader trend that includes Taiwan insurance companies and Hong Kong pension funds reconsidering their US asset holdings. US rating downgrades and concerns about eroding Fed independence are prompting investors to seek alternatives, such as highly-rated Australian and UK corporate bonds.

Last week, concerns about Fed independence intensified after former President Trump attempted to remove Fed Governor Cook, pushing the spread between 5-year and 30-year US Treasury yields to its widest level since 2021. Strategist Simon White noted that "US real yields appear biased toward rising, contrary to the trend typically seen when governments increasingly interfere with monetary policy."

Louca, who previously led the macroeconomic team at Queensland Treasury, said ART has taken profits from yield curve steepening trades involving 2-year and 10-year Treasuries. He now considers UK gilts and Australian government bonds more attractive.

"If you look at Australia's situation, you'll find it's more focused on fiscal consolidation. Australia also has two engines - mining and housing - but they're no longer growing as robustly as in the past," he said.

He also believes the market has "overreacted" to recent unexpected changes in UK food and energy prices, making UK gilts still attractive.

Beyond underweighting US Treasuries, the fund is also bearish on the US dollar, favoring currencies like the yen and even gold. "Some might say 'don't fight the Fed,' but you also can't fight the White House. We must respect the policy mix coming out of the White House - and you could argue this is contributing to dollar weakness," he said.