Norway's $2.3 Trillion Fund Proposes Slashing U.S. Treasury Holdings

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 broad restructuring of its fixed-income strategy. The recommendation, detailed in a letter to Norway's finance ministry, aims to enhance returns and improve diversification by shifting capital from government debt to corporate bonds.

A Major Portfolio Overhaul

Norges Bank Investment Management (NBIM) recommended cutting the weighting of government bonds within its benchmark bond index from 70% to 50%. According to the letter, U.S. Treasuries, the fund's largest single bond holding, would see the most substantial reduction. Based on the fund's holdings at the end of June, this change would equate to a sale of nearly $80 billion from its current position of approximately $215 billion in U.S. government debt, according to Reuters calculations.

In the letter, Norges Bank Governor Ida Wolden Bache and NBIM CEO Nicolai Tangen stated that a 50% allocation to government bonds would be "sufficient to cover the liquidity needs, including in periods of turbulence in financial markets." The fund noted it is awaiting a response from the finance ministry and affirmed that any changes would be implemented gradually to minimize market disruption.

Shifting Allocations

The proposal details a strategic pivot towards non-government debt, such as mortgage-backed securities, to gain better exposure to different risk premiums. While the fund's exposure to U.S. government debt would fall, its allocation to U.S. corporate and other non-government debt is slated to rise sharply.

Key proposed changes to the bond index weightings include:

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• U.S. government bonds: Reduced from 34.1% to 21.9%
• U.S. non-government debt: Increased from 16.2% to 27.6%
• Euro area government bonds: Reduced from 16.8% to 14.1%
• Japanese government bonds: Increased from 4.6% to 7.4%

Notably, the overall weighting of the bond index to the U.S. dollar would remain nearly stable, falling only slightly from 52.9% to 52.5%.

Market Impact and Context

As the world's largest sovereign wealth fund, owning an average of 1.5% of all globally listed companies, NBIM's portfolio decisions can influence global market flows. This proposal comes amid recent turmoil in government bond markets, where rising inflation and high government debt levels have pushed long-term borrowing costs higher.

In a separate letter, the fund also proposed exploring an increase in unlisted assets to mitigate concentration risks in its equity portfolio, which have grown with the surging valuations of a handful of large U.S. technology companies.