World’s Biggest Sovereign Wealth Fund May Dump $80 Billion in US Treasuries — Here’s Where It Wants to Put the Money Instead
Norges Bank Investment Management, manager of the world’s largest sovereign wealth fund with $2.3 trillion in assets, has proposed reducing its exposure to U.S. Treasuries while shifting more of its bond portfolio toward riskier U.S. debt, including mortgage-backed securities.
Rebalancing Toward Agency MBS
In a letter to Norway’s finance ministry Tuesday, Norges Bank recommended cutting the government debt share of its benchmark bond index to 50% from 70%. The change would reduce the fund’s U.S. Treasury allocation by 12.2 percentage points, equivalent to roughly $80 billion.
The Treasury reduction would largely be offset by increased allocations to non-government U.S. debt, including agency mortgage-backed securities.
Fund Favors Agency Mortgage-Backed Securities
Norges Bank said MBS carry risks beyond credit losses because borrowers can refinance when interest rates fall, allowing them to repay mortgages early and leaving investors to reinvest at lower yields. Investors therefore demand compensation for the prepayment risk.
The fund said securitized bonds, including agency MBS, should be included in the benchmark because they provide exposure to additional risk premiums and create a more diversified portfolio.
Agency MBS issued or guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae also have credit quality close to that of U.S. government bonds, according to Norges Bank.
Japan Gains As U.S. Government Debt Falls
Under the proposed changes, U.S. government bonds would account for 21.9% of the benchmark, down from 34.1%. Eurozone government debt would decline to 14.1% from 16.8%, while Japanese government bonds would rise to 7.4% from 4.6%. The U.K. allocation would remain at 4.2%.
Despite the reshuffle, dollar-denominated assets would remain broadly unchanged at 52.5%, compared with 52.9% currently.
Norges Bank Governor Ida Wolden Bache and CEO Nicolai Tangen said a 50% government-bond allocation would remain sufficient to meet liquidity needs during periods of financial-market turbulence.
Disclaimer: This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.
Image via Shutterstock