Norges Bank Investment Management, the world’s largest sovereign wealth fund with $2.3 trillion in assets, proposed reducing its holdings of U.S. Treasury securities by $80 billion, according to a letter sent to Norway’s finance ministry on Tuesday. The fund recommended trimming government debt exposure in its benchmark bond index while increasing investments in riskier U.S. debt types, including mortgage-backed securities (MBS).
The fund’s manager advised that securitized bonds, such as agency MBS and government-related bonds, be included in the bond index to provide broader market exposure and diversify the benchmark. Norges Bank highlighted that MBS risk arises mainly from prepayment risk, as borrowers can refinance mortgages at lower rates, rather than default risk. The MBS debt is backed by Fannie Mae, Freddie Mac, and Ginnie Mae, with credit quality close to U.S. government bonds.
This move marks a significant shift in the sovereign wealth fund’s U.S. debt portfolio, reducing Treasury holdings by 12.2 percentage points while increasing non-government U.S. debt exposure. The fund’s strategy reflects a preference for capturing risk premiums associated with securitized debt, which could influence other large investors given Norges Bank’s $2.3 trillion asset base. The adjustment contrasts with traditional benchmarks that focus predominantly on government bonds.
Following the proposed rebalancing, Norges Bank would hold a more diversified U.S. bond portfolio, balancing lower Treasury exposure with increased mortgage-backed securities. The fund’s letter emphasized that this approach offers a more comprehensive risk premium exposure than current indices, aiming to enhance long-term returns for Norway’s sovereign wealth assets.