Taiwan's mega US debt pile raises alarm amid US dollar weakness, Man Group warns

Investors are overlooking the risk an extended unwind in huge long US dollar positions among  Taiwanese investors could put upward pressure on Asian currencies and spill across other asset classes in the region, according to Andrew Swan, the head of Asia equities at hedge fund Man Group. 

Mr Swan told a GSFM investor briefing that Taiwanese investors hold around $US1 trillion in US treasuries alone, which is equivalent to around 100% of the nation's gross domestic product (GDP). 

Other economists estimate that Taiwan's pensions, insurance, and government sectors now hold around US$1.7 trillion in total US dollar denominated debt - hedged or unhedged - across security classes, which is equal to around double the island nation's entire GDP. 

As the US dollar falls the unhedged debt's Taiwanese dollars value sinks and cranks the risk of a rush to unwind positions by dumping US assets to plug the potential for ballooning losses. 

Giant unwind 

In May, the Taiwanese dollar soared nearly 10% in just two days versus the US dollar sparking worries around a massive capital rotation that spilt across other classes, with potential to spiral into another financial crisis given the size of exposures. 

"I think the view on the [US] dollar [direction] is extremely important for the region in terms of capital flows and implications for monetary policy globally, and therefore financial conditions and growth domestically," said Swan. 

"What we can tell from the dollar move so far and how it's impacted asset prices, it seems to be more of a hedging move by investors, more than anything else, the long dollar position has been building up by investors for a long time."

Swan said Taiwan has run massive trade surpluses of 10% to 12% with the US for many years, meaning the difference has been invested in long-dated US debt instruments, which may lose real value as Washington extends huge fiscal deficits and its tariff war. 

"We've seen this long dollar position built up by broader financial players, governments, and households. And I think what we saw in May this year has very big implications for the region and the outlook for the dollar, and what it means for Asia," said Swan. 

"There's been no growth domestically in Taiwan. And as a result, investors have started to invest more in the US increasingly on an unhedged basis, because the cost of hedging has been so high. 

"So, what the Taiwanese central bank really did was send a warning shot across the bow for financial players in general, that they cannot rely on this US dollar strength anymore."

Shares look expensive 

Aside from the risk of a market-moving unwind in Taiwan's US debt holdings, other risks cited to the bull run in US and global equities since President Trump revealed his Liberation Day tariff war on April 2 include old-fashioned valuation as investors get ahead of themselves. 

Speaking at the GSFM event, Eric Souders, a director and portfolio manager at Payden & Rygel, said that despite greater clarity around US tariffs, the nominal and real levels of growth in the US all point to a slowing US economy.

“The US equity market is currently pricing in a very optimistic economic outcome, with forward multiples near all-time highs at 24x. Additionally, earnings growth expectations are suggestive of a strong economic outcome, particularly in 2026, where earnings growth expectations are near 13 per cent," Mr Souders told the seminar.  

"The US interest rate market appears to be pricing an outcome that is more consistent with a soft landing, with two cuts from the Fed expected in the next six months.

“In general, fixed income yields in the five to six per cent range look attractive, particularly when compared to other markets that appear expensive, such as equities."