The world’s largest sovereign wealth fund has revealed asset adjustment plans to gradually reduce holdings of US treasury bonds and optimise its global bond portfolio. With huge asset size, this fund acts as one of the key long-term institutional investors in the US treasury market. The portfolio rebalancing reflects reassessment of long-term yields and exchange rate risks of US treasuries among global sovereign capital and will reshape capital flows within international bond markets.

For decades, US treasury bonds served as core holdings for national sovereign reserves and sovereign wealth funds thanks to superior liquidity. In recent years, however, US treasury outstanding volume keeps expanding while US fiscal deficits stay elevated. Coupled with volatile US dollar exchange rates, sovereign capital pursues diversified allocation and cuts exposure concentrated on US treasuries. A rising number of sovereign funds and central bank reserve managers increase allocations to other developed market government bonds, emerging-market sovereign debt, gold, infrastructure and equities to spread portfolio risks.

Bond market institutions interpret the sovereign fund’s reduction as a gradual medium-and-long-term rebalancing instead of immediate mass sell-off. It will not trigger a US treasury market crash directly, yet it weakens buying demand and creates upward pressure on long-end US treasury yields. For global capital markets, diversification of sovereign capital allocation will continue over the long run, making capital flows more scattered and reshaping the landscape of cross-border capital. From China’s perspective, global sovereign asset rebalancing brings volatility in cross-border capital flows and may affect foreign exchange and domestic bond markets. Investors will monitor the fund’s implementation pace of divestment, long-end US treasury yields and annual asset allocation reports of sovereign funds worldwide.