Hong Kong's Exchange Fund, the HK$4 trillion pool that backs the Hong Kong dollar, earned HK$18.6 billion in the third quarter of 2026, down 83% from the previous quarter, as rising global bond yields all but erased its fixed-income returns, the Hong Kong Monetary Authority said on Nov. 6.

The result matters beyond the HKMA's own books. The fund's balance sheet stands behind the currency peg that anchors Hong Kong interest rates, mortgage costs and bank funding, and a smaller gain arrives at a time when the government is already leaning on bond sales to fund its budget.

Bonds earned almost nothing in the Exchange Fund's quarter

Third-quarter income was 83% below the HK$109.4 billion the fund made from April to June, according to figures the HKMA presented to the Legislative Council's Panel on Financial Affairs. For the first nine months of the year, investment income totaled HK$171.9 billion and net income HK$140.0 billion. The fund earned HK$337.4 billion in all of 2025.

Bonds were the weak spot. The fund made a profit of about HK$300 million on its bond holdings in the quarter, down 99% from a year earlier, The Standard reported. The U.S. Federal Reserve raised rates by 25 basis points in September, and the 10-year U.S. Treasury yield reached about 5.3% at the end of the quarter, its highest since 2007, the HKMA's briefing showed. Higher yields push down the market value of existing bonds.

Hong Kong stocks helped. The fund booked a HK$9.1 billion gain on local equities after a HK$6.8 billion loss in the second quarter, according to The Standard; the Hang Seng Index rose 7.6% in the quarter. Other equities contributed HK$1.5 billion, and currency translation on non-Hong Kong dollar assets added HK$7.7 billion.

Over nine months, the mix looks different. Other equities produced HK$55.2 billion, bonds HK$49.4 billion, foreign exchange HK$42.0 billion and other investments HK$28.0 billion, while Hong Kong equities showed a HK$2.7 billion loss, the briefing showed.

HKMA warns of a hard fourth quarter

HKMA Chief Executive Eddie Yue told lawmakers that the fund's performance would remain challenging in the fourth quarter because of global uncertainty, The Standard reported. He named rising energy prices and AI-related investment as two key risks, and said regulators were watching whether company revenues could support heavy AI spending, since a shortfall could cause credit problems. Concerns that AI and data center building might slow have driven sharp swings in stock markets, he said.

Yue said the fund had reduced its allocation to U.S. dollar assets since the end of last year and raised its holdings of other investments to make the portfolio more defensive. It has also shortened the duration of its bonds to meet liquidity needs, which lowers the damage if yields keep rising. He said the fund needed to take "a long-term view" on asset allocation, according to The Standard. He added that markets are watching how the U.S. election outcome feeds into energy prices, inflation and the direction of interest rates.

The fund's total assets stood at HK$4,081.0 billion on Sept. 30, down from HK$4,161.2 billion at the end of 2025, and its accumulated surplus was HK$857.9 billion.

Reserves rise and banks stay well capitalized

Hong Kong's official foreign currency reserve assets rose to US$440.5 billion at the end of October from US$432.9 billion at the end of September, the HKMA said in a separate release the same day. The reserves equal more than five times the currency in circulation and about 36% of Hong Kong dollar M3 money supply.

The banking figures in the briefing were steady. Total loans grew 7.7% in the first nine months of 2026, or 10.2% on an annualized basis. The classified loan ratio fell to 1.82% at the end of June from 2.01% at the end of 2025, and the capital adequacy ratio of locally incorporated banks was 24.2%, against an 8% international minimum. Retail banks' net interest margin widened to 1.53% in the first half from 1.47% a year earlier. The HKMA kept its base rate unchanged at its most recent decision.

Housing remains soft. The Rating and Valuation Department's price index stood at 185.5 in September, about 19% below its September 2021 peak of 230.2. New mortgage approvals fell to 6,240 in September from a peak of 9,526 in June, although the mortgage delinquency ratio held at a low 0.11%.

The government forecasts real GDP growth of 3.5% to 4.5% for 2026, the briefing showed. The HKMA's next Exchange Fund data, its analytical accounts, are due on Nov. 13.