Norway’s $2 trillion sovereign fund proposes deep cuts to US Treasury holdings: Here’s why

On Friday, the management of Norway’s $2 trillion wealth fund advanced a major proposal to cut its exposure to US Treasuries as part of a broader overhaul aimed at boosting bond returns.

According to Norges Bank Investment Management, reducing the proportion of government bonds within its fixed-income index to 50% from 70% will significantly cut its exposure to US Treasuries.

The crucial changes would mean slashing nearly $800 billion from the fund’s current holdings of about $215 billions of US Treasuries. It has been observed that government bond markets have been under pressure with increasing inflation and government debt levels.

Norges Bank IM said it would await the ministry’s feedback, adding that any changes would be implemented gradually to limit market impact and transaction costs.

The Norges bank further clarified that changing the fundamental methodology or composition of the index to give better factor exposure. In this connection, the spokesperson said: “What changes is the mix inside the dollar market: less U.S. government debt, ​correspondingly more U.S. mortgage and government-related bonds.”

Under the new proposal, the US Treasuries would fall and the projected distribution to US non-government debt would jump from 16.2% to 27.6%; moreover, this shift means that the entire bond index’s weighting in US dollar would fall slightly from 52.9% to 52.5%.