Norway's $2.3 trillion sovereign wealth fund has proposed cutting its government bond allocation from 70% to 50%, a shift that would chiefly reduce its U.S. Treasury holdings. The fund wants to redirect the freed capital into corporate bonds and mortgage-backed securities to seek higher returns.
Norges Bank Investment Management has recommended slashing the government subindex of its bond portfolio from 70% to 50%, according to a letter to Norway's finance ministry made public Friday. NBIM said the lower level would still provide enough liquidity during market turbulence while freeing capital to seek better returns elsewhere.
Treasury share set to shrink
The proposed reallocation would gradually cut NBIM's Treasury holdings from 34.1% to 21.9%, while euro area holdings would fall from 16.8% to 14.1%. Japanese government bonds, by contrast, would rise to 7.4% from 4.6%. NBIM also wants to weight its government bond holdings by market value instead of GDP, citing the high debt loads of almost all developed economies.
The move lands at a sensitive moment for the bond market. Economist Mohamed El-Erian told CNBC that "reliable buyers and holders of U.S. Treasurys are under pressure," pointing to Japan, China and Gulf countries. He added that while the size of NBIM's shift isn't large, the signal that traditional holders are becoming less reliable is significant.
Fund eyes riskier fixed income
NBIM plans to increase its holdings of non-government U.S. fixed income to 27.6% from 16.2%, including corporate bonds. CEO Nicolai Tangen and central bank chief Ida Wolden Bache said the fund could earn higher premiums by diversifying into mortgage-backed securities, which they judge as well-positioned for a long-term investor.
Tangen and Wolden Bache noted mortgage-backed securities tend to move opposite to equities during crises, which could add volatility reduction more similar to government bonds than corporate bonds. NBIM currently holds around $1.65 trillion in equities and $592 billion in fixed income.
The fund has made record profits in recent quarters from its tech and AI holdings, but Tangen has warned those returns won't be sustainable in a downturn. A recent stress test found an AI correction could wipe $740 billion, or 35%, off the fund's value.
Source: US Top News and Analysis
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