Key facts
- Norway's $2.3 trillion sovereign wealth fund proposed cutting its U.S. Treasury holdings.
- The fund recommended reducing its government bond index weighting from 70% to 50%.
- This would lead to a reduction of nearly $80 billion in U.S. Treasuries.
- The changes aim to improve returns and diversification within the fund's bond portfolio.
- The proposals were made in response to questions from Norway's finance ministry.
The manager of Norway's $2.3 trillion sovereign wealth fund has proposed a significant reduction in its U.S. Treasury holdings as part of a broader strategy to enhance returns on its bond investments. Norges Bank Investment Management (NBIM) recommended lowering the weighting of government bonds within its benchmark bond index from 70% to 50%.
U.S. Treasuries, which represent the fund's largest holding, would experience the most substantial cut, potentially reducing its exposure by nearly $80 billion from the approximately $215 billion held as of the end of June. This move comes amid recent turmoil in government bond markets, driven by rising inflation and increasing government debt levels.
NBIM stated that the proposed changes, submitted in response to queries from Norway's finance ministry, would still ensure sufficient liquidity, even during periods of financial market turbulence. The fund also suggested increasing investments in unlisted assets to mitigate concentration risks in its equity portfolio, which has grown due to the surge in prices of a few U.S. tech companies.
Under the proposed bond index adjustments, the allocation to U.S. government bonds would decrease from 34.1% to 21.9%, while the allocation to euro area debt would fall more modestly. Conversely, the allocation to Japanese government bonds is proposed to increase from 4.6% to 7.4%. The fund also plans to boost its allocation to U.S. non-government debt, including mortgage-backed securities, from 16.2% to 27.6%, aiming for better diversification and exposure to risk premiums. These adjustments are intended to align the index more closely with broader market weightings, with the overall weighting to the U.S. dollar expected to decrease only slightly.