Norway's $2.3 trillion sovereign wealth fund, managed by Norges Bank Investment Management (NBIM), has proposed a significant restructuring of its fixed-income portfolio that could reduce its US Treasury holdings by roughly $75 billion. The move is aimed at diversifying risk and enhancing returns, according to a letter sent to Norway's Ministry of Finance.
Under the proposal, the fund would cut the share of government bonds within its bond portfolio to 50% from the current 70%. The freed-up allocation would be redirected toward other sources of risk premiums, such as corporate credit and securitized debt, which NBIM argues offer better compensation for risk.
Impact on US Treasuries
The shift would have the most pronounced effect on US government debt. Bloomberg calculations indicate that the overall reduction in government bond exposure would amount to about $58 billion, but US Treasury holdings could decline by approximately $75 billion. This is because the fund also plans to adjust the composition of its government bond portfolio, reducing the US share from 34.1% to 21.9%.
In contrast, Japanese government bonds would be a primary beneficiary. NBIM proposes increasing their allocation from 4.6% to 7.4%, which Bloomberg estimates would represent an increase of roughly $20 billion. Euro-area government bonds would also see a reduction, with their share falling from 16.8% to 14.1%.
Shift to market-value weighting
Beyond the overall reduction, NBIM wants to change how its government bond holdings are weighted. Currently, allocations are based primarily on gross domestic product (GDP). The fund proposes switching to a market-value-based approach, citing the high debt burdens across almost all developed economies. This change would likely reduce exposure to heavily indebted nations and increase allocations to countries with larger bond markets relative to their economies.
NBIM argues that a 50% government-bond allocation would still provide sufficient liquidity during periods of market turbulence, while allowing the fund to seek higher returns elsewhere. The proposal reflects the fund's growing concern about the fiscal outlook and long-term yields in major economies, particularly the United States.
Treasury market under pressure
The proposed reallocation comes at a sensitive time for the US Treasury market. Long-dated Treasury yields have climbed to multi-year highs as investors worry about the US fiscal trajectory and rising government debt. On Friday, the 10-year Treasury yield hovered around 4.7541%, while the 30-year yield was near 5.2328%. The two-year yield stood at 4.3390%.
Investors are closely watching the upcoming August nonfarm payrolls report, due later Friday, for clues about the labor market and the Federal Reserve's interest-rate path. Economists polled by Reuters expect employers to have added 56,000 jobs in August, following a surprise decline of 23,000 in July. The unemployment rate is expected to remain at 4.2%. The report follows weaker-than-expected ADP private payroll data, which showed US companies added just 38,000 workers in August versus expectations for 47,000.
Next week, fresh inflation data will also be in focus as markets assess the outlook for the Fed's September 15–16 policy meeting. The recent easing in Treasury yields from multiyear highs has provided some relief, but the underlying fiscal concerns remain.
Fund looks beyond government debt
The proposed changes highlight the scale of the fixed-income portfolio managed by Norway's wealth fund. As of June 30, about 30% of the fund was invested in bonds, representing more than $615 billion in fixed-income assets. Around 59.5% of those assets were in government bonds, according to the fund's latest figures. If NBIM's proposal is approved, the government-bond allocation would fall materially.
Established in 1998 to invest Norway's oil revenues, the sovereign wealth fund has increasingly benefited from its exposure to US and Asian technology companies and other beneficiaries of the artificial intelligence boom. The fund's equity portfolio has delivered strong returns, but the fixed-income side is now being recalibrated to better manage risk and return.
For the Treasury market, the proposal underscores how concerns over government borrowing and long-term yields are influencing allocation decisions among the world's largest institutional investors. As equities have rebounded on easing yields, the bond market remains sensitive to fiscal policy and inflation data.
While the proposal is not yet final, it signals a potential shift in demand for US Treasuries from one of the world's largest sovereign funds. If implemented, it could add to upward pressure on long-term yields, which have already been elevated. The fund's move also aligns with a broader trend of investors seeking alternatives to government debt, as seen in gold's recent rally and increased interest in inflation-hedging assets.
This article is for informational purposes only and does not constitute financial advice.
