European and US debt crisis hits MPF international bond funds hardest, with over 30% of assets in Western government bonds

As the European and US debt crisis deepens and France’s credit rating looks shaky, MPF fund managers — bound by strict investment rules to hold only top-rated government bonds — face a dilemma: if US and French sovereign ratings are cut one by one, international bond funds will suffer most among MPF schemes.

Why are international bond funds most exposed?

Over 30% of these funds’ assets sit in European and US government bonds — a far bigger share than balanced or guaranteed funds. For example, the HSBC Global Bond Fund holds 5.7% French, 4.3% US and 3.3% UK government bonds; Fidelity’s international bond fund holds 6.57% US and 3.23% French bonds; Sun Life’s First State MPF Global Bond Fund holds 20.8% German bonds of various maturities and as much as 18.8% US bonds.

How big is the impact on MPF overall?

MPFA statistics for March show US and European bond investments account for only 4% and 3% of total MPF assets — the overall impact is limited. The third-most-popular conservative money-market funds invest mainly in Hong Kong-dollar assets with no Western-bond exposure, and balanced or guaranteed funds hold only small weights in them.

How must fund managers respond to downgrades?

Under MPF regulations, government or central-bank bonds must carry the highest available rating from approved agencies; if Fitch and Moody’s follow S&P in downgrading, managers must reallocate as required. An MPFA spokesman said the authority is watching markets closely to ensure industry compliance. Members can check their own funds’ bond fund holdings and learn about bond-fund risks via MPF educational resources.