TradingKey - Amid growing apprehensions about the risks posed by Trump's tariff and tax strategies, major Australian institutional investors are dialing back their U.S. Treasury holdings. Since Trump unveiled reciprocal tariff measures in April, the “Sell America” trend has gathered momentum, with bearish sentiment toward U.S. government debt becoming pervasive.
Funds SA, managing about $30 billion in assets, is among the Australian fund heavyweights reducing its exposure. Con Michalakis, Chief Investment Officer at Funds SA, stated the fund is now “several percentage points underweight” on U.S. Treasuries relative to its initial target allocation.
He highlighted that uncertainties surrounding U.S. fiscal policy and subpar yields compared to holding risks have diminished the allure of U.S. debt.
Furthermore, investment risks in U.S. Treasuries are tied to Trump's policies. Analysts caution that if the “capital tax” provision within the “One Big, Beautiful Bill” receives Congressional approval, it would enable the U.S. to levy additional taxes on foreign investors.
Queensland Investment Corporation (QIC), managing $86 billion in assets, also announced it is reducing its U.S. Treasury investments for select client portfolios.
Analysts suggest the pivot by Australian investors signals a weakening belief in “American exceptionalism.”
According to the U.S. Treasury's April International Capital (TIC) flow report, following China's central bank's reduction of U.S. Treasury holdings in March, China slipped to the third-largest U.S. creditor. Holdings dipped further in April to $757.2 billion, marking a 16-year low.
Data reveals the U.S. dollar has depreciated against all other G10 currencies over the past three months. The Bloomberg Dollar Index has declined over 7% this year, highlighting the diminishing appeal of dollar-denominated assets.
Institutional investors are increasingly turning to other asset classes as a solution.
Michalakis noted that Funds SA plans to reallocate capital towards U.S. investment-grade and high-yield credit assets while decreasing overall dollar exposure. He added that if U.S. fiscal conditions worsen, the dollar might weaken first, leading to a steepening yield curve. Consequently, the fund prefers slightly increasing Australian dollar positions and maintaining a broader non-U.S. currency exposure.
Beverley Morris, Head of Liquid Markets at QIC, mentioned that investors are considering boosting holdings of Australian, European, and Japanese government bonds. Diversifying into currencies offering superior protection is sensible.
Future Fund, an Australian pension investor, remarked that the U.S. as an investment destination has become more unpredictable, necessitating higher risk premiums.
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