$80 billion! The world's largest sovereign wealth fund plans to significantly reduce its holdings of US Treasury bonds.

The world’s largest sovereign wealth fund is considering a major overhaul of its bond portfolio, with U.S. Treasury bonds as its target.

According to the Financial Times, Norwegian sovereign wealth fund manager Norges Bank Investment Management (NBIM) sent a letter to the Norwegian Ministry of Finance on Tuesday, recommending that the weighting of government bonds in the benchmark bond index be reduced from 70% to 50%. This adjustment would reduce the fund's exposure to global government bonds by approximately $106 billion, with the majority of the reduction coming from US Treasury bonds, amounting to nearly $80 billion.

This proposal comes against the backdrop of escalating conflict between the US and Iran, inflationary concerns, and a continued sell-off in global bond markets this year. US Treasury yields are currently at multi-year highs, and despite Treasury Secretary Scott Bessent's multiple interventions in the bond market this summer, yields remain stubbornly high. Following the announcement, attention has once again intensified regarding the trend of sovereign wealth funds reducing their holdings of US Treasury bonds.

Reduce holdings of government bonds and shift to institutional MBS

Based on NBIM's recommendation, the fund plans to reduce its exposure to U.S. Treasury bonds by 12.2 percentage points while increasing its holdings of non-government U.S. fixed-income assets by 11.4 percentage points. The funds released from the reduction will primarily be redirected to fixed-income products with higher risk premiums, such as mortgage-backed securities (MBS).

In its letter, NBIM stated that the adjusted 50% allocation to government bonds "is sufficient to cover liquidity needs, including during periods of financial market turmoil," while the remainder of the bond index should "provide more exposure to sources of risk premium."

The agency also pointed out that the target MBS is mainly guaranteed by government agencies such as Fannie Mae, Freddie Mac, and Ginnie Mae, and its credit quality is "close to that of US government bonds," but its yield is slightly higher than that of Treasury bonds due to the risk of prepayment.

Dollar exposure remained largely unchanged, and holdings of UK government bonds were untouched.

Despite a significant reduction in government bond holdings, an NBIM spokesperson stated that the fund's overall exposure to dollar assets remains "substantially unchanged." According to the letter, dollar exposure will decrease by only 0.5 percentage points. Meanwhile, the fund's allocation to UK government bonds will remain unchanged, while its holdings of Japanese government bonds are planned to increase by 2.8 percentage points.

Regarding index benchmarks, NBIM recommends adjusting the widely used Bloomberg Global Aggregate Bond Index to create a new benchmark with government bonds and other developed market bonds (including MBS and development bank bonds) each accounting for approximately half. Furthermore, the agency suggests following the practices of other large sovereign wealth funds, using the market value of outstanding debt rather than the issuer's GDP as the weighting for government bonds.

The recommendation is still pending approval, with a final decision expected in 2027.

It is worth noting that the above proposal is currently only a suggestion. The letter, co-signed by Norges Bank Governor Ida Wolden Bache and NBIM CEO Nicolai Tangen, is a response to an inquiry from the Ministry of Finance earlier this year regarding the positioning of the fund's bond portfolio, and is also part of a broader set of recommendations from the "Expert Committee," whose full report is expected to be submitted next January. The Ministry of Finance will submit its final recommendations to Parliament in the spring of 2027.

This timeline suggests that actual adjustments will take some time. In April of this year, Norwegian Finance Minister Jens Stoltenberg publicly stated that the fund "has no plans to reduce its US exposure" and added, "I don't expect any major changes." NBIM's proactive suggestion to adjust its portfolio indicates that the institution is conducting a more proactive reassessment of its bond portfolio strategy.

The Norwegian Government Pension Fund Global (GPF Global) has assets exceeding $2.3 trillion. Funded by revenues from the sale of Norway's vast oil resources, it invests in overseas markets, serving the dual function of smoothing short-term fluctuations in the national budget and reserving funds for future economic investment. Currently, approximately 26% of the fund's assets are allocated to fixed income, and its allocation to the US market is lower than its weighting in most global indices.

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