The US Federal Reserve’s rate hike on Tuesday came as no surprise, but the announcement that it will start shrinking its $4.5 trillion balance sheet as early as this year has put insurers and pension funds on alert in Asia.

The Fed will slowly increase its asset sales to $50 billion a month one year after its starts its normalisation programme, wrote Mark Haefele, global chief investment officer at UBS Wealth Management, in a note. Such moves could add to upward pressure on yields, he added.

However, Paul Carrett, group chief investment officer at Hong Kong’s FWD Insurance, was sanguine about the situation, suggesting the Fed would take a lot longer to unwind its balance sheet than it took to expand it to its current size.

“They will be patient and not do something too destructive to the market,” he told AsianInvestor on the sidelines of the Financial Times’ Investment Management Summit in Hong Kong.

Nonetheless, some Asian institutions are taking action. Thailand’s Government Pension Fund is shortening the duration of its fixed income portfolios in preparation for the Fed’s asset sell-off, said Arsa Indaravijaya, head of investment strategy.

The central bank will probably dispose of Treasury bonds and mortgage-backed securities, he told AsianInvestor yesterday, speaking on the sidelines of the summit.

One important issue will be who buys the Fed’s assets, said Mark Konyn, group CIO at Asian insurer AIA, speaking on a panel at the summit. For example, if the central bank depends on foreign buyers, that would be potentially positive for the dollar but could raise risks for the US economy, he noted.

Insurers positive on rate rise

Meanwhile, insurance firms welcomed the Fed’s 25-basis-point rise, which will take its target benchmark level to between 1% and 1.25%.

Speaking at the event, Charles Scully, Asia-Pacific CIO at US insurer MetLife, said a higher US rate was good for the insurance industry.

Carrett agreed, noting that when interest rates rise, credit spreads (the difference between the yields of sovereign and corporate bonds) widen. “Higher interest rates will make it easier [for insurers] to develop new products,” he added. “Meanwhile, high credit spreads means we’ll get paid more for the same risks.”

While Carrett said he would continue to invest in credit, he has no plans to increase his emerging-market bond allocation, but would remain opportunistic in respect of the asset class.