The United States is one downgrade away from triggering a forced exodus from its own debt. Not from adversaries. From allies. Hong Kong’s Mandatory Provident Fund system, which manages over HK$1.3 trillion in pension assets, has drawn up a plan to cut its U.S. Treasury holdings if the country loses its final AAA credit rating. That’s not a threat. That’s a regulatory requirement.
Under Hong Kong law, pension fund managers can only allocate more than 10 percent of their portfolios to sovereign debt if the issuer holds a AAA rating from an approved agency. The U.S. used to have that rating from all three major firms. Then came the downgrades. Moody’s pulled the plug in May. Fitch and S&P had already walked. That leaves just one agency—Japan’s Rating and Investment Information Inc. still holding the line. If R&I blinks, the selloff begins.
The pension regulator has already met with industry groups. The Hong Kong Investment Funds Association and the Trustees’ Association sat down with the MPF Schemes Authority on June 11. Contingency plans were requested. The clock is ticking. If the downgrade comes, fund managers will have three to six months to rebalance. That means selling Treasuries. That means reallocating to other AAA-rated sovereigns. Germany and Singapore are on the list. The United States would be off it.
The FTSE Russell index, which guides many of these allocations, would also be forced to adjust. Treasuries currently make up 46.37 percent of the MPF World Government Bond Index. That weighting would fall. The ripple effect would hit every fund tracking that benchmark. This is not a theoretical exercise. FTSE Russell has already run the numbers.
The broader market impact is harder to predict. Hong Kong’s pension system is large, but not dominant. Still, forced selling from even a $210 billion pool can move yields, especially at the long end. The 30-year Treasury yield has already spiked to levels not seen since 2023. Another downgrade could push it higher. That would raise borrowing costs across the board. Mortgages. Corporate debt. Municipal bonds. All of it.
The downgrade risk is not isolated to Hong Kong. Many institutional funds around the world have mandates that restrict holdings to top-rated debt. If the U.S. slips, others may follow. The label matters. Not because the fundamentals changed overnight, but because the rules say it does.
This is what happens when credibility becomes conditional. One letter. Three agencies. Trillions in exposure. The United States is still the world’s largest bond issuer. But that status does not come with immunity.
Sources:
https://sg.finance.yahoo.com/news/hong-kong-pensions-plan-cut-014453557.html