Norway’s $2.3T sovereign fund proposes cutting $80B in US Treasury holdings

Norway’s sovereign wealth fund—valued at $2.3 trillion—has recommended restructuring its government bond portfolio, potentially cutting its US Treasury bond holdings by around $80 billion. The move aims to enhance returns by shifting allocations toward other fixed-income instruments with elevated risk profiles.

Portfolio Benchmark Adjustment

In a letter sent Tuesday to Norway’s Ministry of Finance, Norges Bank Investment Management (NBIM) proposed lowering the weight of government bonds in its bond index benchmark from 70% to 50%. The letter was signed jointly by Ida Wolden Bache, Governor of Norges Bank, and Nicolai Tangen, CEO of NBIM, in response to earlier questions from the Ministry regarding the role and weighting of the bond portfolio within the fund.

Global Government Bond Allocation Impact

According to Financial Times estimates, the proposal would reduce the fund’s allocation to global government bonds by approximately $106 billion, with the largest portion coming from US Treasuries. Currently, the fund invests slightly less than 26% of its total assets in fixed-income instruments.

Rising Yields and Debt Concerns

Long-term government bond yields in the United States and other G7 countries have surged to levels not seen since before the 2007 financial crisis, raising concerns about borrowing costs for nations already burdened by heavy debt loads. The proposals come amid growing apprehension over rising government debt levels and a broad-based sell-off in global bond markets this year. Escalating inflation fears—fueled in part by the US–Iran conflict—have contributed to the pressure on bond prices. Although US Treasury Secretary Scott Bessent intervened multiple times in the Treasury market over the summer, yields remain elevated compared with prior years.

Shift Toward Agency Mortgage-Backed Securities

The fund proposes offsetting the reduction in US Treasury exposure by increasing investments in higher-yielding, higher-risk fixed-income instruments—particularly US agency mortgage-backed securities (MBS). These securities are primarily backed by guarantees from US government agencies, meaning Norway’s exposure to US sovereign default risk would decline only marginally. However, they offer slightly higher returns than Treasuries due to prepayment risk associated with residential mortgages.

Liquidity Coverage and Risk Premium Exposure

The letter states that allocating 50% of the bond portfolio to government bonds would be sufficient to meet liquidity needs—including during periods of financial market stress—while the remaining portion of the bond index would provide exposure to additional sources of risk premiums.

Credit Quality and Guarantees

NBIM noted that the agency MBS it proposes to acquire are guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae, and carry credit quality close to that of US government bonds.

Allocation Shifts Across Jurisdictions

Under the proposal, the fund’s share of US Treasury bonds would fall by 12.2 percentage points, while its holdings of non-government US fixed-income instruments would rise by 11.4 percentage points. Financial Times estimates this reallocation would cut Treasury allocations by roughly $80 billion. In contrast, the fund’s holdings of UK government bonds would remain unchanged, while its Japanese government bond position would increase by 2.8 percentage points.

Dollar Exposure Remains Largely Stable

A spokesperson for NBIM stated that the fund’s exposure to the US dollar would remain “essentially unchanged” under the proposal, with the dollar’s weight declining by about 0.5 percentage points. The fund’s US investment share is already lower than the weight assigned to the United States in most global benchmarks.

Policy Context and Prior Statements

The proposal follows remarks made by Norwegian Finance Minister Jens Stoltenberg in April, in which he affirmed the fund “does not intend to reduce its exposure to the United States,” despite suggestions from some Norwegian lawmakers that the fund’s American asset exposure is excessively high.

Return Diversification and Index Methodology

The NBIM spokesperson clarified that the objective of the change is to diversify return sources. The letter also recommends that Norway follow other major sovereign wealth funds in determining government bond weights based on the market value of total outstanding debt—rather than on the issuing countries’ gross domestic product.

Fund Mandate and Origin

The fund, whose assets exceed $2 trillion, invests exclusively in foreign markets. Its capital has accumulated from Norway’s oil and gas resource revenues and serves two core purposes: smoothing short-term fluctuations in the state budget and saving for future economic investment.