Norway’s wealth fund wants to hold fewer government bonds, and U.S. Treasuries would take the biggest hit. Reuters calculated that the plan would strip nearly $80 billion from a Treasury position of about $215 billion at the end of June.
The manager, Norges Bank Investment Management, set out the idea in a letter published this week. It recommended cutting the government share of its benchmark bond index to 50% from 70%. The letter was signed by Ida Wolden Bache, governor of Norges Bank, and Nicolai Tangen, the manager’s chief executive. A 50% share, they wrote, “will be sufficient to cover the liquidity needs, including in periods of turbulence in financial markets.”
The proposal answers questions the finance ministry put to the fund about its bond strategy. Norges Bank IM said it would wait for the ministry’s reply, and that any changes would come gradually, to hold down market impact and trading costs.
Where the money would go
Treasuries would not simply disappear from the portfolio. The index weighting for U.S. government bonds would fall from 34.1% to 21.9%. Euro area debt would slip from 16.8% to 14.1%. Japanese government bonds would rise from 4.6% to 7.4%, while the UK stays at 4.2%.
The catch is what replaces them. The proposed weighting for U.S. debt outside government paper would jump from 16.2% to 27.6%. Overall exposure to the dollar would barely move, easing from 52.9% to 52.5%. The fund said the biggest change in the index would be more non-government debt, including mortgage-backed securities, for better diversification and exposure to risk premiums.
In a separate letter, the fund also proposed considering more unlisted investments. Part of the reason is the concentration risk that has built up in its equity portfolio as a handful of U.S. tech companies have surged. The fund can already own unlisted real estate and renewable energy assets, but it holds a lower share of them than comparable funds.
The timing is awkward for bond markets. Long-term borrowing costs have soared recently as inflation and government debt levels have unsettled investors. The Norwegian fund is the world’s largest sovereign wealth fund, worth $2.3 trillion, and owns on average 1.5% of all listed companies globally.
