Norges Bank Investment Management, the manager of Norway's $2.3 trillion sovereign wealth fund, has proposed a substantial reduction in its holdings of U.S. Treasuries. The move is part of a broader strategy to adjust its bond investments and enhance returns, according to a letter released this week.
The fund's management recommends lowering the weighting of government bonds within its benchmark bond index from 70% to 50%. U.S. Treasuries, which currently represent the largest holding, would see the most significant decrease under this proposal.
Calculations indicate that these changes could lead to a reduction of nearly $80 billion in the fund's current U.S. Treasury holdings, which stood at approximately $215 billion as of the end of June. This proposed adjustment comes amid a challenging environment for government bond markets, where rising inflation and increasing government debt levels have contributed to soaring long-term borrowing costs.
Norges Bank Investment Management, the world's largest sovereign wealth fund, holds an average of 1.5% of all publicly listed companies globally. Its substantial scale means that its investment decisions can influence global market flows. However, any implemented changes to its bond holdings are not expected to occur before several months into 2027 at the earliest.
The proposals were submitted in response to inquiries from Norway's finance ministry regarding the wealth fund's bond investment strategy. Norges Bank Investment Management stated that it would await the ministry's decision, emphasizing that any adjustments would be implemented gradually to minimize market impact and transaction costs.
These recommendations are slated to be part of a white paper process next spring, following which the finance ministry will submit a final proposal to parliament for review. The fund's management noted that a 50% allocation to government debt within the bond index would still be sufficient to meet liquidity needs, even during periods of financial market turbulence.
In a separate communication, the fund also suggested exploring increased investments in unlisted assets. This consideration is partly driven by a desire to mitigate concentration risks that have emerged in its equity portfolio, exacerbated by the recent surge in share prices of several major U.S. technology companies.
While the proposed changes would reduce the allocation to U.S. government bonds from 34.1% to 21.9% of the bond index, the fund intends to increase investments in other fixed-income instruments, such as mortgage-backed securities. This shift aims to improve diversification and exposure to risk premiums. The overall weighting to the U.S. dollar within the bond index is expected to decrease only slightly, from 52.9% to 52.5%, as the allocation to U.S. non-government debt is projected to rise from 16.2% to 27.6%.
The fund also plans to adjust its allocation to other government bonds, with the weighting for euro area debt falling from 16.8% to 14.1%, while the allocation to Japanese government bonds would increase from 4.6% to 7.4%. The allocation to UK government bonds is expected to remain at 4.2%. These adjustments are intended to align the fund's bond index more closely with broader market weightings.