Norges Bank Investment Management, the world’s largest sovereign wealth fund with $2.3 trillion in assets, proposed cutting its U.S. Treasury holdings from 34.1% to 21.9% as part of a major debt portfolio reshuffle. According to a letter sent to Norway’s Finance Ministry and made public, the fund aims to reduce the government subindex of its bond holdings from 70% to 50% to diversify risk and seek higher returns elsewhere.
### Proposed Cuts to U.S. Treasury securities, according to reporting cited by Yahoo Finance. The proposal reduces the overall government bond share in its benchmark bond index to 50% from 70%. The reallocation shifts assets away from sovereign debt across major developed markets. Alongside the reduction in U.S. Treasuries, euro area holdings would drop from 16.8% to 14.1%. Meanwhile, the fund proposed increasing its share of Japanese government bonds from 4.6% to 7.4%, while keeping its United Kingdom holdings unchanged at 4.2%. Furthermore, NBIM recommended weighting its government bond holdings by market value instead of gross domestic product, citing high debt loads across developed economies. The fund proposes raising its allocation of corporate bonds from 16.2% to 27.6%, according to CNBC. Tangen and Wolden Bache argued that the fund can earn higher premiums by branching into riskier asset classes, specifically agency mortgage-backed securities (MBS) guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae. According to the fund’s letter, these securitized bonds possess credit quality close to U.S. government bonds while providing an additional reduction of volatility. Because mortgages can be refinanced at lower interest rates, MBS entail a prepayment premium to compensate investors for this refinancing risk. Despite the heavy reduction in U.S. Treasuries, the fund’s overall exposure to dollar-denominated assets would remain largely stable, moving slightly from 52.9% to 52.5% under the proposed portfolio structure.
### Market Context and Fiscal Pressures
The proposed rebalancing arrives during a sensitive period for the U.S. Treasury market. Long-dated yields have hovered near decade-highs as investors scrutinize the U.S. fiscal trajectory, with national debt reaching $40 trillion and the federal deficit pacing toward $2 trillion for the fiscal year. Economist Mohamed El-Erian spoke to CNBC regarding the strategic implications of the move. “Reliable buyers and holders of U.S. Treasurys are under pressure,” El-Erian said, noting that traditional buyers such as Japan, China, and Gulf countries are facing their own economic dynamics. Addressing NBIM specifically, El-Erian added, “The size isn’t big, but the signal that traditional holders and buyers are becoming less reliable is a very important one.”
Worth a look