MANAGER OF NORWAY`S $2TN OIL FUND PROPOSES SLASHING U.S. TREASURY HOLDINGS / THE FINANCIAL TIMES

Manager of Norway’s $2tn oil fund proposes slashing US Treasury holdings

Overhaul of bond positions suggested to Ministry of Finance aims to boost returns

Calum Kapoor and Ramsay Hodgson in London

The proposals would cut the fund’s global government bonds allocation by about $106bn, according to FT estimates © Norges Bank

The manager of Norway’s $2.3tn sovereign wealth fund has proposed an overhaul of its government bond portfolio that could see it slash its holdings of US Treasuries by about $80bn, as it looks to other types of debt to try to boost returns.

Norges Bank Investment Management said in a letter to the country’s finance ministry on Tuesday that it recommended reducing the weighting of government debt in the fund’s benchmark bond index from 70 per cent to 50 per cent.

The proposals would cut the fund’s global government bonds allocation by about $106bn, according to FT estimates, with most of this reduction coming in Treasuries. 

Just under 26 per cent of the overall fund is invested in fixed income.

The proposal comes amid mounting concerns over rising government debt levels and a global bond sell-off this year, as the US war with Iran fuels inflation fears. 

Treasury secretary Scott Bessent has intervened in the Treasury market multiple times this summer, but yields still stand at multiyear highs.

A lower Treasury allocation for Norway’s Government Pension Fund Global would be offset by purchases of riskier fixed-income products, particularly debt such as mortgage-backed securities.

These MBS are largely backed by government agencies, meaning Norway’s exposure to the risk of a US government default is only being reduced modestly. 

They do, however, offer slightly higher yields than Treasuries because of the risk that mortgages are repaid early.

“A government [bond] share of 50 per cent will be sufficient to cover the liquidity needs, including in periods of turbulence in financial markets . . . [while] the remaining part of the bond index should provide exposure to more sources of risk premiums,” the letter said.

The agency MBS is “guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae, and the credit quality is close to that of US government bonds”, it added.

The letter, signed by Ida Wolden Bache, governor of Norges Bank, and Nicolai Tangen, chief executive of NBIM, was sent in response to questions earlier this year from the finance ministry about the role and weighting of the fund’s bond portfolio.

The letter was signed by Ida Wolden Bache, governor of Norges Bank, and Nicolai Tangen, chief executive of NBIM © Naina Helén Jåma/Bloomberg

The fund’s US dollar exposure would be “essentially unchanged” despite the proposals, said a NBIM spokesperson. 

According to the letter, the fund’s dollar exposure would fall by 0.5 percentage points. Its US allocation is below the weighting used in most global indices.

The proposals come after comments by finance minister Jens Stoltenberg in April that the fund had “no plans to reduce our exposure in the US”, even though some Norwegian lawmakers had suggested the fund was overexposed to US assets.

“There have been some questions [about] ‘should we reduce’; that’s a political decision,” Stoltenberg told the FT in April. 

“But I don’t foresee any big changes.”

NBIM’s proposal is to cut the fund’s exposure to US Treasuries by 12.2 percentage points, while increasing its holdings of non-government US fixed income by 11.4 percentage points, the letter said. 

This would lead to a reduction of almost $80bn in its allocation to Treasuries, according to FT estimates.

The portfolio’s allocation to UK gilts would be unchanged while its position in Japanese government bonds would rise by 2.8 percentage points under the plans.

The fund, which has more than $2tn in assets amassed through sales of the Scandinavian country’s vast oil resources, is invested in foreign markets and is used to smooth out short-term fluctuations in the nation’s budget and to save for future investment in its economy.

The NBIM spokesperson said the letter was only “advice” that formed part of broader recommendations to the finance ministry from an “Expert Council”, due by January. 

The ministry will make its final recommendations to parliament in the spring of 2027.

The letter proposed adapting the Bloomberg Global Aggregate bond index, a widely followed benchmark, into a gauge split roughly in half between government bonds and other forms of developed-market debt, such as mortgage-backed securities and bonds issued by development banks.

“The reason behind this change is to achieve a diversification of return sources,” the spokesperson said.

The letter also proposes following other large sovereign funds in weighting government bonds in proportion to the market value of their outstanding debt, rather than the GDP of the issuers.

Additional reporting by Toby Nangle, Joseph Cotterill and Kate Duguid