Norway’s enormous sovereign wealth fund is considering a significant reduction in its holdings of U.S. government debt, in a move that could add to concerns surrounding the future of the Treasury market.
Norges Bank Investment Management, which oversees Norway’s roughly $2.3 trillion Government Pension Fund Global, has proposed reducing the proportion of government bonds in its benchmark portfolio from 70% to 50%.
U.S. Treasuries
U.S. Treasuries supposedly would take the largest share of the reduction, potentially cutting the fund’s holdings by almost $80 billion from around $215 billion.
The proposal reflects a desire to diversify the fund and improve returns rather than abandon U.S. assets altogether.
Non-Government U.S. Debt
The fund intends to increase its exposure to non-government U.S. debt, including mortgage-backed securities and other government-related bonds. Its overall exposure to the U.S. dollar would remain broadly unchanged.
The timing is nevertheless significant. Government bond markets have faced renewed pressure as investors worry about high inflation, mounting government debt and rising long-term borrowing costs.
Warning?
Norway’s decision could therefore be interpreted as another warning that some major institutional investors are becoming less comfortable holding large quantities of traditional government debt.
Japanese Government Bonds
The fund also plans to increase its allocation to Japanese government bonds, while reducing exposure to euro-area government debt.
Importantly, this is reportedly a proposal rather than an immediate sell-off. Any changes would likely be introduced gradually, with Norway’s Finance Ministry and parliament involved in the approval process. The earliest significant changes are not expected before 2027.
Nevertheless, when one of the world’s largest investors starts questioning the traditional role of government bonds, markets are likely to take notice.