Norway’s Wealth Fund Proposes Cutting US Treasury Holdings by Nearly $80 Billion

Norway’s $2.3 trillion sovereign wealth fund could cut its US Treasury holdings by nearly $80 billion under a proposed overhaul of its bond investments.

Norges Bank Investment Management recommended reducing the government-bond share of its benchmark bond index to 50% from 70%. US Treasuries, currently the fund’s largest bond holding, would take the biggest reduction. The proposal would cut holdings from about $215 billion, based on the fund’s position at the end of June.

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We recommend that the government subindex of the bond index be reduced from 70% to 50%.

The changes reflect pressure across government bond markets, where long-term borrowing costs have risen as investors have become more concerned about inflation and government debt. The fund’s size gives its portfolio decisions wider significance. It owns an average of 1.5% of all listed companies globally.

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A government share of 50% will be sufficient to cover the liquidity needs, including in periods of turbulence in financial markets.

The proposals came in response to questions from Norway’s finance ministry about the fund’s bond strategy. Norges Bank Investment Management said it would await the ministry’s response and make any changes gradually to limit market disruption and transaction costs. The recommendations will form part of a submission to the ministry in January, followed by discussion in the fund’s annual white-paper process next spring. Parliament would then hold a hearing before a final recommendation.

The proposed bond-index changes would shift money toward non-government debt, including mortgage-backed securities, to improve diversification and gain exposure to risk premiums. The fund said its total US dollar exposure would remain around 50%, but with less US government debt and more US mortgage and government-related bonds. In a separate proposal, it also suggested considering more unlisted assets, partly to reduce concentration risks linked to the rise of a small number of US technology companies.

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What changes is the mix inside the dollar market: less US government debt, correspondingly more US mortgage and government-related bonds.