Deconstructing the credit rating requirements for MPF bonds

Relationship between credit ratings and default risk

A bond’s credit rating is a key indicator of the issuer’s risk of default. Credit rating agencies assess an issuer's creditworthiness based on its debt and income positions and assign ratings accordingly. If an issuer’s financial situation deteriorates — for example, due to a significant decline in revenue aecting its ability to repay debt — the agency may downgrade its rating and/or its outlook. Conversely, if the issuer’s financial condition improves, the rating and/or outlook may be upgraded.

Seven approved credit rating agencies

While credit ratings are not guarantees or absolute indicators, they offer investors a reference for assessing the credit risk of a particular issuer. They can also be used to compare the creditworthiness of dierent issuers. Globally, a few credit rating agencies provide these services, with the most well-known being Fitch Ratings, Moody’s Investors Service and S&P Global Ratings. In addition, the MPFA has approved four other credit rating agencies, including China Chengxin (Asia Pacific) Credit Rating Company Limited, CSPI Credit Ratings Company Limited, Lianhe Ratings Global Limited and Rating and Rating & Investment Information, Inc..

AAA rating issuers are exempt authority

You would have heard of the “AAA” credit rating, which is the highest rating that cab be assigned by S&P Global Ratings for issues that are considered to carry extremely low default risk. As of May 31, 2025, only a few countries or regions hold this top-tier rating, including Australia, Canada, Germany, and Singapore etc. Hong Kong is currently rated AA+ by S&P, just one notch below the highest rating. Governments, central/reserve banks, or multilateral international institutions that receive the highest credit rating from any MPFA-approved credit rating agency are designated as an "exempt authority" issuers, and bonds issued by these exempt authorities are not subject to the usual diversification limits under MPF regulations, meaning an MPF fund can hold more than 10% of its assets in these bonds.

BBB - and below are speculative grade

MPF regulations also set the minimum credit rating requirements for debt securities in MPF funds to mitigate credit risk. For general constituent funds, the minimum long-term credit rating is BBB-. Bonds rated below BBB- are considered non-investment grade, carrying relatively higher default risk. For capital preservation funds, the requirement is stricter — the minimum long-term credit rating must be A-, reflecting their lower risk tolerance.

The U.S. still considered an exempt authority issuer

Although credit ratings from different agencies are generally consistent, they may not always align completely. In cases of discrepancies, if any one of the MPFA-approved agencies assigns a rating that meets the guideline requirements, the bond is deemed compliant. Even though several agencies have downgraded credit rating of the U.S., at least one MPFA-approved agency still assigns the highest credit rating to the U.S., thereby allowing it to retain its status as an exempt authority issuer. As a result, MPF funds can still hold an unlimited proportion of U.S. government bonds.