Norway's $2.3T Wealth Fund Plans Deep Cut to US Treasury Holdings

The world's largest sovereign wealth fund is preparing to pull back from US Treasuries. The manager of Norway's $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.

The size of the cut

The changes would mean cutting nearly $80 billion from the fund's current holdings of about $215 billion of U.S. Treasuries as of the end of June, according to Reuters calculations.

The shift would take U.S. Treasury holdings from 34.1% to 21.9% of the fund's bond index. The proposal would also reduce the fund's euro area government bond holdings from 16.8% to 14.1%, while increasing its Japanese government bond allocation from 4.6% to 7.4%.

Where the money goes instead

The rebalancing of its portfolio would add other types of U.S. bonds and other assets such as mortgage-backed securities. Mortgage-backed securities would account for roughly 13% of the proposed new index, against zero today.

Wolden Bache and Tangen noted that agency mortgage-backed securities, backed by guarantees from Fannie Mae, Freddie Mac, and Ginnie Mae, have tended to appreciate when equity markets fall, making their risk profile closer to that of government bonds than to corporate debt.

While U.S. Treasuries exposure would fall, the proposed allocation to U.S. non-government debt would jump from 16.2% to 27.6%, meaning that the overall bond index's weighting to the U.S. dollar would fall only slightly, from 52.9% to 52.5%.

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Why it matters for the bond market

Government bond markets have been in turmoil recently, with long-term borrowing costs soaring as rising inflation and government debt levels spooked investors.

This comes as rising deficits are forcing the US to issue more debt while foreign buyers have shown less appetite for Treasuries. Economist Mohamed El-Erian told CNBC on Friday that Norway's move matters less for its size than for the signal it sends.

Timing and process

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. Any cuts to its bond holdings are unlikely to be implemented until several months into 2027 at the earliest.

The proposals will form part of recommendations to the ministry in January. They will be discussed as part of the fund's annual white paper process next spring, after which the ministry will make a final recommendation to parliament which will then hold a hearing, a Norges Bank IM spokesperson said.

Options market and stocks to watch

The rotation into agency MBS and away from Treasuries is a story for rates and mortgage-linked names. Watch for flow in:

TLT: The long-dated Treasury ETF is the cleanest read on shifting foreign demand for US duration.

MBB: The agency MBS ETF stands to see incremental sponsorship if NBIM's framework becomes a template for other large allocators.

AGNC and NLY: Mortgage REITs are directly leveraged to agency MBS spreads and could benefit from marginal demand shifts.

UUP: Watch the dollar for any signal that reserve managers are following Norway's lead. Also keep an eye on other news around foreign Treasury demand.

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