Norges Bank Investment Management, the world’s biggest sovereign wealth fund with $2.3 trillion in assets, proposed reshuffling its U.S. debt holdings away from Treasuries.
In a letter to Norway’s finance ministry on Tuesday, the fund’s manager recommended slashing government debt in its benchmark bond index. That would result in $80 billion of U.S. Treasury securities being offloaded.
But the reduction in Treasuries would be mostly offset by purchases of riskier forms of U.S. debt, including mortgage-backed securities.
The fund pointed out that MBS risk is not from the threat of default. Instead, it’s because mortgages can be refinanced at a lower interest rate, benefiting borrowers over investors. So MBS debt entails a prepayment premium to account for this risk.
“Norges Bank’s advice is that securitized bonds (including mortgage-backed securities, so-called agency MBS) and government-related bonds should be included in the bond index,” the fund’s letter said. “A broad market index provides exposure to more risk premiums and gives a more diversified benchmark index than today.”
It added that MBS are guaranteed by mortgage giants Fannie Mae, Freddie Mac and Ginnie Mae, “and the credit quality is close to that of US government bonds.”
Following the proposed rebalancing, the fund would see its holdings of U.S. Treasuries trimmed by 12.2 percentage points, while the share of non-government U.S. debt would jump by 11.4 percentage points.
The overall exposure to dollar-denominated assets would remain largely unchanged at 52.5% versus 52.9% under the current portfolio.
While the Norwegian sovereign wealth fund characterized the proposed changes as a realignment to match broader market weightings, it comes at a sensitive political time.
U.S. national debt has soared to $40 trillion, and the federal deficit is on track to hit $2 trillion this fiscal year, with no signs of any effort to rein that in.
Treasury Secretary Scott Bessent has also shown an interventionist streak to keep Treasury yields in check and prevent the dollar was rising too much.
At the same time, President Donald Trump has launched trade wars against longtime allies, threatened to reduce the U.S. commitment to NATO, and even suggested that Greenland could be seized militarily.
Amid a more belligerent U.S. administration, holding dollar assets has become riskier as they could become targeted by sanctions from Washington someday.
In fact, dollar-denominated assets like Treasury bonds now make up a smaller share of central bank reserves around the world with gold accounting for a larger share.
While Norges Bank Investment Management is cutting the overall share of government bonds in its benchmark, the rebalance will be uneven, with Treasuries seeing the biggest hit.
U.S. government bonds will drop to 21.9% from 34.1%, while debt from the euro zone will see a more modest dip to 14.1% from 16.8%. But Japanese government bonds would increase to 7.4% from 4.6%, and the UK would remain unchanged at 4.2%.
After all those moves, the fund’s weighting to government bonds within its benchmark bond index would drop to 50% from 70%.
“A government share of 50% will be sufficient to cover the liquidity needs, including in periods of turbulence in financial markets,” Norges Bank Governor Ida Wolden Bache and Norges Bank Investment Management CEO Nicolai Tangen wrote in the letter.
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