Norway’s $2.3 trillion sovereign wealth fund is proposing a major shift in its fixed-income portfolio that could reduce its US Treasury holdings by about $75 billion as it seeks to diversify risk and improve returns.
Norges Bank Investment Management, which manages the fund, has recommended cutting the share of government bonds within its bond portfolio to 50% from 70%.
The remaining allocation would be directed toward other sources of risk premiums, according to a letter sent to Norway’s Ministry of Finance.
The proposed change would gradually reduce US Treasury holdings from 34.1% of the fund’s government bond allocation to 21.9%.
Treasuries face largest reduction
The shift would have its largest impact on US government debt.
Bloomberg calculations estimate that the reduction in government bonds would amount to about $58 billion overall, while US Treasury holdings could decline by roughly $75 billion.
The fund would also reduce its exposure to euro-area government bonds, with the allocation falling from 16.8% to 14.1%.
Japanese government bonds would be among the main beneficiaries.
NBIM proposed increasing their share from 4.6% to 7.4%, which Bloomberg estimates would represent an increase of roughly $20 billion.
NBIM said a 50% government-bond allocation would still provide sufficient liquidity during periods of market turbulence while allowing the fund to seek higher returns elsewhere.
The fund also wants to change how its government bond holdings are weighted. Rather than basing allocations primarily on gross domestic product, it wants to use market value, citing the high debt burdens across almost all developed economies.
Treasury market under pressure
The proposed reallocation comes at a sensitive time for the US Treasury market.
Long-dated Treasury yields have climbed to multi-year highs as investors have become increasingly concerned about the US fiscal outlook and rising government debt.
On Friday, Treasury yields were little changed as investors awaited the latest US employment report.
The 10-year Treasury yield was around 4.7541%, while the two-year yield stood at 4.3390%. The 30-year Treasury yield was holding near 5.2328%.
Investors are closely watching August nonfarm payrolls and unemployment data for clues about the health of the US labor market and the Federal Reserve’s interest-rate outlook.
Economists polled by Reuters expect employers to have added 56,000 jobs in August, following a surprise decline of 23,000 in July. The unemployment rate is expected to remain at 4.2%.
The report follows weaker-than-expected private payroll data from ADP, which showed US companies added 38,000 workers in August versus expectations for 47,000.
Markets will also turn to fresh inflation data next week as investors assess the outlook for the Federal Reserve’s September 15–16 policy meeting.
Fund looks beyond government debt
The proposed changes reflect the scale of the fixed-income portfolio managed by Norway’s wealth fund.
About 30% of the fund was invested in bonds as of June 30, representing more than $615 billion in fixed-income assets.
Around 59.5% of those assets were invested in government bonds, according to the fund’s latest figures.
The government-bond allocation would therefore fall materially if NBIM’s proposal is approved.
Established in 1998 to invest Norway’s oil revenues, the sovereign wealth fund has increasingly benefited from its exposure to US and Asian technology companies and other beneficiaries of the artificial intelligence boom.
For the Treasury market, the proposal also highlights how concerns over government borrowing and long-term yields are increasingly influencing allocation decisions among some of the world’s largest institutional investors.
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