Hong Kong Investors Shift Towards US Treasuries Amid Higher Financing Costs

Hong Kong investors who have seen their wealth decline due to the Federal Reserve's interest rate hikes may want to consider shifting their portfolios towards US Treasuries. The city's currency is pegged to the US dollar, so when the Fed raises rates, Hong Kong flinches.

The scars from the 525-basis-point hiking cycle that began in March 2022 are still fresh. Home prices and the Hang Seng Index plummeted by as much as 16% and 44% from their late-2021 peaks. The Hong Kong Mandatory Provident Fund, which manages HK$1.7 trillion in assets, suffered its worst loss since the Global Financial Crisis.

A typical MPF account has two-thirds of its allocation in equities, 21% in debt securities, and the rest in cash deposits. With most tenors now yielding above 5%, US sovereign debt is looking appealing to Hong Kong investors, who face almost no currency risk.

Gavekal Research's Will Denyer noted that the current setup is more akin to early 2000 before the dot-com bubble burst, when bonds were a good buy. Although the Fed is not expected to replicate its last hiking cycle, higher financing costs, a weak Chinese economy, and Beijing tightening cross-border capital outflows are major headwinds that won't go away soon.