Norway’s Sovereign Wealth Fund Proposes Cutting U.S. Treasury Holdings

Norway’s Sovereign Wealth Fund Proposes Cutting U.S. Treasury Holdings

In a letter addressed to the country’s finance ministry, the heads of Norges Bank Investment Management (NBIM) recommended reducing the government subindex of its bond holdings from 70% to 50%. NBIM stated that this adjusted level would maintain sufficient liquidity during periods of market turbulence while allowing the institution to pursue greater returns in other areas.

Details of the Proposed Portfolio Reallocation

Under the newly proposed strategy, NBIM would gradually adjust its sovereign bond allocations across major global markets. The planned changes include:

* Reducing U.S. Treasury holdings from 34.1% to 21.9%. * Decreasing euro area government bond holdings from 16.8% to 14.1%. * Increasing the share of Japanese government bonds from 4.6% to 7.4%.

In addition to shifting geographical weights, NBIM intends to alter how it measures its government bond holdings. Instead of weighting them by Gross Domestic Product (GDP)—a method complicated by the heavy debt loads carried by nearly all developed economies—the fund plans to begin weighting its government bond holdings by market value.

To offset the reduction in sovereign debt, NBIM plans to increase its holdings of non-government U.S. fixed-income assets, such as corporate bonds, raising them from 16.2% to 27.6%.

Significance for the U.S. Treasury Market

The proposed shift arrives at a delicate time for the U.S. Treasury market. Long-dated yields have recently been pushed to decade-highs as investors grow increasingly concerned over the United States’ fiscal trajectory and expanding debt load.

Economist Mohamed El-Erian noted in an interview with CNBC that reliable buyers and holders of U.S. Treasurys—citing Japan, China, and Gulf countries—are currently under pressure. While addressing NBIM’s specific proposal, El-Erian remarked that while the monetary size may not be massive, the signal that traditional holders and buyers are becoming less reliable is a very important one.

Strategies for Volatility and Risk

Chief Executive Officer Nicolai Tangen and Norway’s central bank chief, Ida Wolden Bache, pointed out that the fund could capture higher premiums by branching out into riskier assets like mortgage-backed securities. They noted that such assets are well-positioned for a long-term investor to weather.

Tangen and Wolden Bache added that mortgage-backed securities—which gained notoriety during the 2008 Financial Crisis—tend to move inversely to equities during economic crises. Consequently, they believe these securities could provide an additional reduction in portfolio volatility comparable to government bonds rather than corporate debt.

NBIM currently manages approximately $1.65 trillion in equities—owning nearly 1.5% of all shares in the world’s listed companies—alongside $592 billion in fixed income. Established in 1998 to invest revenues generated from Norwegian oil under strict guardrails to ensure longevity, the fund has achieved record profits in recent quarters thanks to major investments in Asian and U.S. tech firms as well as beneficiaries of the artificial intelligence boom, including semiconductor stocks.

However, leadership remains cautious. Tangen has warned that current return levels are unsustainable in the event of a market downturn. Highlighting these risks, a recent stress test conducted by CNBC‘s reported fund metrics indicated that an artificial intelligence market correction could wipe $740 billion, or 35%, off the fund’s total value.