Buildings in the Bardcode Project financial district in Oslo, Norway, on Tuesday, October 17, 2023. Bloomberg | Bloomberg | Getty Images Norway’s sovereign wealth fund has proposed cutting the allocation of government bonds in its $2.3 trillion investment portfolio, mainly affecting its holdings of US Treasuries, as it seeks to diversify its risk exposure and boost returns. The bosses of Norges Bank Investment Management wrote in a letter to the country’s Finance Ministry, made public on Friday, that they recommended reducing the government sub-index of its bond holdings from 70% to 50%, a level they said would provide enough liquidity during market turmoil while allowing it to seek higher returns elsewhere. The proposed reallocation would gradually reduce NBIM’s Treasury holdings from 34.1% to 21.9%, reduce its euro zone holdings from 16.8% to 14.1%, and increase its stake in Japanese government bonds to 7.4% from 4.6%. NBIM also wants to start weighting its government bond holdings by market value rather than GDP due to the high debt loads of almost all developed economies and Treasury bonds under pressure. The potential change would come at a sensitive time for the Treasury market, with long-term yields pushed to decade highs as investors worry about the U.S. fiscal path and an increasingly heavy debt burden. “Reliable buyers and holders of U.S. Treasuries are under pressure,” economist Mohamed El-Erian told CNBC’s Carolin Roth in an interview Friday, citing Japan, China and the Gulf countries. Referring to NBIM’s proposal to reduce its own stake in Treasuries, El-Erian said: “The size is not large, but the signal that traditional holders and buyers are becoming less reliable is very important.” as corporate bonds, to 27.6% from 16.2%. Chief Executive Nicolai Tangen and Norway’s central bank chief Ida Wolden Bache said the fund could earn higher premiums by diversifying into riskier assets, such as mortgage-backed securities, which they believe are well positioned to hold up as a long-term investor. Tangen and Wolden Bache said mortgage-backed securities, which became infamous during the 2008 financial crisis, tend to move in the opposite direction of stocks during crises and could therefore provide “additional volatility reduction” more similar to that of government bonds than corporate bonds. NBIM currently holds around $1.65 trillion in equities (owning nearly 1.5% of all publicly traded company shares in the world) and $592 billion in fixed income. The fund, created in 1998 to invest Norwegian oil revenues with strict barriers to preserve its longevity, has made record profits in recent quarters thanks to its huge investments in American and Asian technology companies and beneficiaries of the AI boom, such as semiconductor stocks. However, Tangen has warned that these profitability levels will not be sustainable in the event of a market slowdown. In the first quarter of 2025, it suffered a $40 billion loss as investors stopped taking risks. A recent stress test by NBIM found that an AI correction could wipe out $740 billion, or 35%, from its value. Choose CNBC as your preferred source on Google and never miss a moment from the most trusted name in business news.
