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Opinion | Why Asia’s sovereign wealth funds are rethinking US Treasuries
Asian funds are no longer treating US Treasuries as the default destination for their surplus capital, but as one option among many
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Pension and sovereign wealth funds across Asia are reassessing the role of US Treasuries in their portfolios as alternative equity and fixed-income assets deliver higher yields and broader diversification of risks.
Recent divestments by Sweden’s Alecta and Denmark’s AkademikerPension have drawn the attention of Asia’s investment managers, even as Norway’s Government Pension Fund Global – the world’s largest sovereign wealth fund – has moved in the opposite direction by increasing its holdings. China’s stockpile of US Treasuries reached its lowest level in 17 years last November, another marker of the shifts under way.
These developments reflect a fundamental change in the way long-term investors evaluate risk. US Treasuries have been seen as liquid and ostensibly risk-free, anchored to the world’s dominant reserve currency.
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That assumption is now being questioned. This is not a rationale for a wholesale exit, but rather a recalibration of an investment landscape shaped by highly leveraged technology companies, incredulous valuations and emerging opportunities in private markets.
Mounting US government debt, recurring political brinkmanship and global conflicts have weakened trust in the US dollar as a safe haven. That has increased Treasury risk premiums, which are the extra return investors demand to hold an asset instead of a safer alternative, compensating them for uncertainty, volatility and potential losses.
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As the risk-premium gap narrows between Treasuries and stocks, the securities’ movements in value become more aligned, more interdependent. Treasuries become less effective as hedges. Fears of a less independent US Federal Reserve under Kevin Warsh, US President Donald Trump’s nominee to be the next central bank chair, could push the risk premium even higher.
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