$80 Billion! World's Largest Sovereign Fund Plans Major Cut in U.S. Treasuries

Norway's sovereign wealth fund is brewing a major bond reshuffle—planning to cut about $80 billion in U.S. Treasury exposure and shift into agency MBS guaranteed by Fannie Mae and Freddie Mac. The move comes amid high Treasury yields and sustained pressure on global bond markets, and market wariness about sovereign funds collectively retreating from U.S. Treasuries may intensify further.

The world's largest sovereign wealth fund is considering a major adjustment to its bond portfolio, targeting U.S. Treasuries.

According to the Financial Times, Norges Bank Investment Management (NBIM), which manages Norway's sovereign wealth fund, wrote to the Norwegian Ministry of Finance on Tuesday recommending that the weight of government bonds in its benchmark bond index be reduced from 70% to 50%. This adjustment would cut the fund's global government bond exposure by about $106 billion, with most of the reduction coming from U.S. Treasuries, amounting to nearly $80 billion.

The proposal comes against a backdrop of rising inflation concerns from the U.S.-Iran conflict and continued selling in global bond markets this year. U.S. Treasury yields are currently at multi-year highs, and Treasury Secretary Scott Bessent has intervened in the Treasury market multiple times this summer, yet yields remain elevated. After the news broke, attention on the trend of sovereign funds reducing U.S. Treasury holdings has heated up again.

Cutting Treasuries, Shifting to Agency MBS

Under NBIM's proposal, the fund plans to cut U.S. Treasury exposure by 12.2 percentage points while increasing holdings of non-government U.S. fixed-income assets by 11.4 percentage points. The freed-up capital will mainly go into fixed-income products with higher risk premiums, such as mortgage-backed securities (MBS).

NBIM said in the letter that a 50% share of government bonds after the adjustment "is sufficient to cover liquidity needs, including during periods of financial market turmoil," while the rest of the bond index should "provide exposure to more sources of risk premium."

The institution also noted that the targeted MBS are mainly guaranteed by government agencies such as Fannie Mae, Freddie Mac, and Ginnie Mae, with credit quality "close to U.S. government bonds," but with slightly higher yields than Treasuries due to prepayment risk.

Dollar exposure largely unchanged, UK gilt holdings untouched

Despite the sharp reduction in Treasury holdings, an NBIM spokesperson said the fund's overall exposure to dollar assets is "largely unchanged." According to the letter, dollar exposure will fall by only 0.5 percentage points. Meanwhile, the fund's allocation to UK gilts will remain unchanged, while Japanese government bond holdings are planned to increase by 2.8 percentage points.

On the index benchmark, NBIM recommends adjusting the widely used Bloomberg Global Aggregate Bond Index to create a new benchmark with government bonds and other developed-market bonds (including MBS and development bank bonds) each accounting for about half. In addition, the institution suggests following the practice of other large sovereign funds by using the market value of outstanding debt rather than the issuer's GDP as the weighting basis for government bonds.

Proposal Still Pending Approval, Final Decision in 2027

It is worth noting that the above proposal is currently only a recommendation. The letter, co-signed by Norges Bank Governor Ida Wolden Bache and NBIM CEO Nicolai Tangen, is a response to the Ministry of Finance's earlier inquiry about the fund's bond portfolio positioning and is also part of broader recommendations from an "expert committee," with the full report expected to be submitted in January next year. The Ministry of Finance will present its final recommendation to parliament in spring 2027.

This timeline means actual adjustments will take time. In April this year, Norwegian Finance Minister Jens Stoltenberg publicly stated that the fund "has no plans to reduce U.S. exposure" and said, "I do not expect major changes." NBIM's proactive proposal for adjustment shows that the institution is conducting a more active reassessment of its bond portfolio strategy.

The Government Pension Fund Global has assets of more than $2.3 trillion, funded by revenues from Norway's large-scale oil resources, invested in overseas markets, and serving the dual purpose of smoothing short-term fluctuations in the national budget and reserving funds for future economic investment. Currently, about 26% of the fund's assets are allocated to fixed income, and its allocation to the U.S. market is already below the weight in most global indices.