Norway's sovereign wealth fund to reduce exposure to government bonds

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Norway’s sovereign wealth fund has proposed cutting the allocation of government bonds in its $2.3 trillion investment portfolio, chiefly affecting its holdings of U.S. Treasurys, as it seeks to diversify its risk exposure and boost returns.

The heads of Norges Bank Investment Management wrote in a letter to the country’s Finance Ministry, made public Friday, that it recommended reducing the government subindex of its bond holdings from 70% to 50% — a level it said would provide sufficient liquidity during market turbulence while allowing it to seek greater returns elsewhere.

The proposed reallocation would gradually cut NBIM’s Treasury holdings from 34.1% to 21.9%, reduce its euro area holdings from 16.8% to 14.1%, and increase its share of Japanese government bonds to 7.4% from 4.6%.

NBIM also wants to begin weighting its government bond holdings by market value instead of gross domestic product because of the high debt loads of almost all developed economies,

Treasurys under pressure
The potential shift would come at a sensitive time for the Treasury market, with long-dated yields pushed to decade-highs as investors fret over the U.S. fiscal trajectory and increasingly heavy debt load.

“Reliable buyers and holders of U.S. Treasurys are under pressure,” economist Mohamed El-Erian told CNBC’s Carolin Roth in a Friday interview, citing Japan, China and Gulf countries.

Addressing NBIM’s proposal to reduce its own share of Treasurys, El-Erian said, “The size isn’t big, but the signal that traditional holders and buyers are becoming less reliable is a very important one.”

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