The manager of Norway’s US$2.3 trillion sovereign wealth fund has proposed significantly cutting its exposure to U.S. Treasuries as part of a wider shake-up of its bond investments to improve returns, according to a letter published this week. Norges Bank Investment Management has recommended reducing its weighting to government bonds within its benchmark bond index to 50 per cent from 70 per cent, with U.S. Treasuries, the biggest holding, getting the biggest cut, according to the letter. The changes would mean cutting nearly US$80 billion from the fund’s current holdings of about US$215 billion of U.S. Treasuries as of the end of June, according to Reuters calculations. Government bond markets have been in turmoil recently, with long-term borrowing costs soaring as rising inflation and government debt levels spooked investors. Norway’s sovereign wealth fund, the world’s largest, owns on average 1.5 per cent of all listed companies globally. Its scale means that portfolio decisions can influence broader market flows. Any changes would be done gradually, Norges IM says The fund’s proposals were made in response to questions from Norway’s finance ministry about the wealth fund’s investment strategy for bonds. Norges Bank IM said it would await the ministry’s response, and any changes would be done gradually to limit market impact and transaction costs. “We recommend that the government subindex of the bond index be reduced from 70 per cent to 50 per cent,” Ida Wolden Bache, governor of Norges Bank, and Norges Bank IM CEO Nicolai Tangen wrote in the letter. “A government share of 50 per cent will be sufficient to cover the liquidity needs, including in periods of turbulence in financial markets.” The fund also proposed considering an increase in investments in unlisted assets in a separate letter, in part as a way to reduce concentration risks that have grown in its equity portfolio amid the boom in the share prices of a handful of U.S. tech companies. Under its current mandate the fund can own unlisted real estate and renewable energy assets, but it has a lower share of unlisted investments than comparable funds. U.S. Treasuries reduction Norges Bank IM said the biggest change to its bond index would be investing in more non-government debt, including mortgage-backed securities, to give it better diversification and exposure to risk premiums. Under the proposals, the bond index weighting to U.S. government bonds would reduce from 34.1 per cent to 21.9 per cent, according to the letter, with the allocation to euro area debt falling more modestly from 16.8 per cent to 14.1 per cent. The allocation to Japanese government bonds would increase from 4.6 per cent to 7.4 per cent, while the U.K. allocation would remain unchanged at 4.2 per cent. The fund said the changes would align the index more closely with the broader market weightings. While U.S. Treasuries exposure would fall, the proposed allocation to U.S. non-government debt would jump from 16.2 per cent to 27.6 per cent, meaning that the overall bond index’s weighting to the U.S. dollar would fall only slightly, from 52.9 per cent to 52.5 per cent. Reporting by Iain Withers and Tommy Reggiori Wilkes; Editing by Jan Harvey
