Key Takeaways
- • Norges Bank Investment Management (NBIM) has recommended cutting its government bond subindex allocation from 70% to 50% of its $2.3 trillion portfolio, according to a letter from its heads to Norway's Finance Ministry made public on a Friday.
- • The proposed reallocation would reduce NBIM's U.S. Treasury holdings from 34.1% to 21.9%, cut euro area holdings from 16.8% to 14.1%, and raise Japanese government bonds from 4.6% to 7.4%.
- • NBIM plans to lift nongovernment U.S. fixed income, including corporate bonds and mortgage-backed securities, to 27.6% from 16.2% to seek higher returns.
- • The move comes as long-dated Treasury yields have reached decade highs amid concerns over the U.S. fiscal trajectory; economist Mohamed El-Erian said the signal that traditional buyers are becoming less reliable is significant even though the size of the cut is modest.
- • NBIM also proposes weighting government bond holdings by market value rather than GDP, and an AI correction stress test estimated a potential $740 billion, or 35%, hit to its value.
Summary
Norway's sovereign wealth fund has proposed reducing its government bond allocation within its $2.3 trillion portfolio, with the largest effect falling on its U.S. Treasury holdings, as it seeks to diversify risk and improve returns. In a letter to the country's Finance Ministry, made public on a Friday, NBIM chief executive Nicolai Tangen and central bank governor Ida Wolden Bache recommended lowering the government subindex of the fund's bond holdings from 70% to 50%. The heads of the fund said this level would still provide sufficient liquidity during market turbulence while allowing greater return opportunities elsewhere, according to CNBC.
Under the proposal, NBIM's Treasury holdings would fall from 34.1% to 21.9%, euro area government bond holdings would decline from 16.8% to 14.1%, and Japanese government bonds would rise to 7.4% from 4.6%. The fund also wants to weight government bond holdings by market value rather than gross domestic product, citing high debt loads across nearly all developed economies. Meanwhile, nongovernment U.S. fixed income, such as corporate bonds, would increase to 27.6% from 16.2%. Tangen and Wolden Bache argued that mortgage-backed securities, which were central to the 2008 financial crisis, could offer higher premiums and, because they tend to move opposite to equities during crises, provide an additional reduction in volatility similar to government bonds.
The proposal arrives as long-dated Treasury yields have hit decade highs amid investor concern over the U.S. fiscal outlook and heavy debt load. Economist Mohamed El-Erian, speaking to CNBC, cited Japan, China and Gulf countries as pressured reliable buyers of Treasurys and said that while NBIM's reduction is not large, the signal that traditional holders are becoming less reliable is important.
NBIM currently holds about $1.65 trillion in equities, representing nearly 1.5% of listed shares worldwide, and $592 billion in fixed income. The fund, established in 1998 to invest Norwegian oil revenues, has posted record profits recently from its large positions in U.S. and Asian technology firms and AI beneficiaries such as semiconductor stocks. Tangen has cautioned that such returns would not be sustainable in a downturn; in the first quarter of 2025 the fund swung to a $40 billion loss as investors turned risk-off. A recent NBIM stress test found an AI correction could erase $740 billion, or 35%, of its value.
Under the proposal, NBIM's Treasury holdings would fall from 34.1% to 21.9%, euro area government bond holdings would decline from 16.8% to 14.1%, and Japanese government bonds would rise to 7.4% from 4.6%. The fund also wants to weight government bond holdings by market value rather than gross domestic product, citing high debt loads across nearly all developed economies. Meanwhile, nongovernment U.S. fixed income, such as corporate bonds, would increase to 27.6% from 16.2%. Tangen and Wolden Bache argued that mortgage-backed securities, which were central to the 2008 financial crisis, could offer higher premiums and, because they tend to move opposite to equities during crises, provide an additional reduction in volatility similar to government bonds.
The proposal arrives as long-dated Treasury yields have hit decade highs amid investor concern over the U.S. fiscal outlook and heavy debt load. Economist Mohamed El-Erian, speaking to CNBC, cited Japan, China and Gulf countries as pressured reliable buyers of Treasurys and said that while NBIM's reduction is not large, the signal that traditional holders are becoming less reliable is important.
NBIM currently holds about $1.65 trillion in equities, representing nearly 1.5% of listed shares worldwide, and $592 billion in fixed income. The fund, established in 1998 to invest Norwegian oil revenues, has posted record profits recently from its large positions in U.S. and Asian technology firms and AI beneficiaries such as semiconductor stocks. Tangen has cautioned that such returns would not be sustainable in a downturn; in the first quarter of 2025 the fund swung to a $40 billion loss as investors turned risk-off. A recent NBIM stress test found an AI correction could erase $740 billion, or 35%, of its value.
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