Norges Bank Investment Management (Norges Bank IM), the manager of Norway’s $2.3 trillion sovereign wealth fund, has set out proposals to materially reshape its bond investments in an effort to lift returns, according to a letter published this week.
The recommended changes would lower the government-bond component of the fund’s benchmark index from 70% to 50% and would cut the fund’s largest single holding, U.S. Treasuries, by the most significant margin. Under the proposals, the bond index weighting to U.S. government bonds would fall from 34.1% to 21.9%.
Reuters calculations cited in the letter indicate the move would translate into a reduction of nearly $80 billion from the fund’s roughly $215 billion of U.S. Treasury holdings as of the end of June. Norges Bank IM framed the change as part of a broader rebalancing of its bond index intended to improve diversification and capture additional risk premia.
The letter, authored by Governor Ida Wolden Bache and Norges Bank IM CEO Nicolai Tangen, also recommended increasing the share of non-government fixed income, including mortgage-backed securities, as a means to broaden exposure and enhance return potential within the bond allocation. Under the proposals, the allocation to U.S. non-government debt would rise from 16.2% to 27.6%.
Regional government-bond weightings would be adjusted as well. The euro area allocation would fall from 16.8% to 14.1%, while the allocation to Japanese government bonds would increase from 4.6% to 7.4%. The weighting for UK government debt would remain at 4.2%. Norges Bank IM said these changes would bring the index more in line with broader market weightings.
Despite the shift away from U.S. government bonds, the overall exposure of the bond index to the U.S. dollar would decline only marginally, moving from 52.9% to 52.5% under the proposed structure.
The proposals were submitted in response to questions from Norway’s finance ministry about the wealth fund’s approach to bond investments. Norges Bank IM said it will wait for the ministry’s reply and emphasized that any implementation would be phased in gradually to limit market impact and transaction costs.
In the letter the managers argued that a 50% government share in the benchmark would be sufficient to meet liquidity needs, including during periods of market turbulence. The letter states: "A government share of 50% will be sufficient to cover the liquidity needs, including in periods of turbulence in financial markets."
Separately, Norges Bank IM proposed exploring a higher allocation to unlisted assets. The fund currently has the ability under its mandate to own unlisted real estate and renewable energy assets, but its share of unlisted investments is lower than that of comparable large funds. The suggested increase in unlisted holdings is described in the letter as one way to reduce concentration risks that have arisen in the equity portfolio amid a run-up in the share prices of a small number of U.S. technology companies.
Market context was noted in the communication: government bond markets have experienced recent volatility, with long-term borrowing costs rising as inflation and elevated government debt levels unsettled investors. The fund’s scale - owning an average of 1.5% of all listed companies globally - means its portfolio decisions can influence wider market flows.
Process and timing
Norges Bank IM made clear that any changes to the benchmark and implementation of new allocations would be conditional on the finance ministry’s response and executed gradually in order to limit market disruption and transaction expenses. The letter was explicit that the recommendations were answers to the ministry’s questions about bond strategy rather than immediate policy changes.