Super Funds Warned of Potential Losses from Rising US Interest Rates
Bank of America has warned Australian superannuation funds that persistent US economic growth could push interest rates into dangerous territory, risking material investment losses. Mark Cabana, the bank’s head of US interest-rate strategy, raised the concern after meeting with senior figures in Australia’s superannuation sector. He argued that current interest rates in the US are not restrictive enough to curb economic activity, potentially forcing the Federal Reserve to raise rates further. The US federal funds target currently sits between 3.75 and 4 percent, with expectations of another increase to between 4 and 4.25 percent.
Cabana emphasized that if rate expectations move into the high-4 percent range, financial conditions could tighten significantly, with mid-5 percent rates potentially slowing economic growth. Australian super funds, which have substantial exposure to US markets, particularly technology companies sensitive to interest rate changes, are already evaluating when higher rates might start constraining growth. "Our guidance to them would be that they should become much more concerned if you do see that macro data continue to be strong, and that financial conditions are not showing signs of caring," Cabana said.
The risks extend beyond equities, as higher rates could reduce bond prices and impact valuations of listed equities, property, and infrastructure, while increasing refinancing pressure on private credit borrowers. Approximately half of the assets managed by APRA-regulated super funds are invested offshore, heightening exposure to international market shocks and foreign exchange risks. The Reserve Bank has also warned about historically low risk premiums and growing exposure to the artificial intelligence investment boom, which could leave global markets vulnerable to a sharp repricing.
Despite these risks, recent regulatory stress testing indicates that Australia’s superannuation system is resilient. APRA’s inaugural system risk stress test, involving six large super funds and the four major banks, found that all participants could withstand severe market and liquidity shocks. However, APRA has advised super funds to strengthen their stress-testing capabilities as the sector grows and more members enter retirement. The latest APRA figures value Australia’s superannuation system at $4.77 trillion as of the end of June.