(Bloomberg) -- A number of Australia's biggest investors say they are cutting their holdings of US Treasuries, citing concern over President Donald Trump's tariff and tax plans.
State-owned Funds SA, which oversees the equivalent of $30 billion, has switched to an underweight position in US sovereign debt, while government-run Queensland Investment Corp., with assets of $86 billion, said some of the clients whose money it manages are reducing their Treasury exposure.
Fiscal uncertainty in the US and the fact that Treasury yields aren't high enough to reflect the risk of holding them is making the securities less attractive, said Con Michalakis, chief investment officer at Funds SA in Adelaide. The money manager is underweight Treasuries by "a couple of percentage points" versus its target allocation, he said.
The shift by Australian investors is indicative of how President Donald Trump's attempts to remake global trade and the American economy are eroding support for the "US exceptionalism" trade. Japan's largest life insurer is looking for alternatives to Treasuries, Asian family offices are cutting or freezing US investments, while Bloomberg's dollar index has tumbled more than 7% this year.
Funds SA has used its lighter position in Treasuries to switch funds toward US investment grade and high-yield credit holdings, and it intends to reduce its overall dollar exposure, Michalakis said.
"The US dollar will go first and if the fiscal situation gets worse you will see steeper yield curves," he said. "We want to be marginally longer the Australian dollar and carrying a lot more non-US foreign-currency exposure."
Trump's announcement of higher global tariffs in April has raised the specter of quicker inflation in the US and slower economic growth. The president is also pushing lawmakers to pass a tax and spending bill that analysts expect will expand the deficit by trillions over the next decade.
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Brisbane-based QIC, which has some of Australia's largest retirement funds among its clients, said the uncertainty and fiscal trajectory of the US meant American assets such as Treasuries are going to require a higher risk premium than in the past.
"We are hearing from those investors that developments over the last few months had caused them to rethink their allocations to the US market, both in terms of fixed income but also currencies," said Beverley Morris, head of QIC's Liquid Markets Group.
Portfolio changes may take months to emerge depending on the schedule of investment committee meetings, yet the tenor of the discussions indicate "that it's a question of when, not if," Morris said. These investors are considering boosting their holdings of government bonds from Australia, Europe and Japan, she said.
Other than concerns about the US government's higher borrowing needs, Trump's "One Big Beautiful Bill Act" includes a provision that would impose a levy on people and institutions based on countries with tax policies that Trump's administration considers unfair. That will potentially impact Australia's superannuation funds which typically have large exposures to the US through equities, fixed income and private markets assets.
AMP Ltd., one of Australia's biggest asset managers, has frozen new long-term US investments due to the bill, head of portfolio management Stuart Eliot said in an interview this month. Australia's sovereign wealth fund, the Future Fund, said this week the US is becoming a more uncertain investment destination that requires a higher risk premium.
The dollar has weakened against all its Group-of-10 peers over the past three months, despite the Israel-Iran conflict that would normally spur haven demand for the currency. That haven role looks to have been taken by the Swiss franc, which has strengthened by 7% against the greenback over the period.
"Where clients have had a significant allocation to the US dollar in their portfolio or their currency hedging basket, it makes sense to diversify away to other currencies that are showing a little bit more of that protection-type quality," QIC's Morris said.
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