Norway's $2.3 trillion sovereign wealth fund, managed by Norges Bank Investment Management (NBIM), has proposed a significant restructuring of its fixed-income portfolio. The fund, the world's largest, plans to reduce the allocation of government bonds in its benchmark index from 70% to 50%. This strategic shift is estimated to result in the sale of nearly $80 billion in U.S. Treasuries.
The proposed reallocation would decrease NBIM's Treasury holdings from 34.1% to 21.9% of its government bond portfolio. Concurrently, it plans to reduce euro area holdings from 16.8% to 14.1% while increasing its share of Japanese government bonds from 4.6% to 7.4%. NBIM also intends to boost its holdings of non-government U.S. fixed income, such as corporate bonds, from 16.2% to 27.6%, and diversify into riskier assets like mortgage-backed securities.
CEO Nicolai Tangen and Norway's central bank chief Ida Wolden Bache stated that the fund could achieve higher premiums by diversifying into these riskier assets. Mortgage-backed securities, despite their role in the 2008 financial crisis, are seen as providing an "additional reduction of volatility" during crises, similar to government bonds. The move is designed to seek greater returns and diversify risk, given recent record profits from equity holdings and concerns about the sustainability of these returns in a market downturn.
Economist Mohamed El-Erian noted that while the size of NBIM's cut in Treasuries might not be massive, the signal it sends about traditional holders becoming less reliable is significant. This potential shift comes at a sensitive time for the Treasury market, with long-dated yields at decade-highs due to investor concerns over the U.S. fiscal trajectory and its growing debt load. The proposal still requires parliamentary approval, expected in 2027.
