Norway fund plans to cut U.S. Treasury exposure in portfolio shift

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Norway fund trims Treasuries

Highlights

NBIM proposes cutting the government bond subindex from 70% to 50%, reducing U.S. Treasury exposure to 21.9% from 34.1%, and shifting weightings to market value.
NBIM plans to increase its non-government U.S. fixed income holdings, including corporate bonds, to 27.6% from 16.2% for higher returns and risk diversification.
In Q1 2025, NBIM reported a $40 billion loss, and stress tests indicate that an AI-driven market correction could wipe $740 billion, or 35%, from fund value.

Proposed bond allocation changes

As reported by CNBC, Norges Bank Investment Management has proposed lowering the government subindex of its bond portfolio to 50% from 70% in a letter from CEO Nicolai Tangen and central bank chief Ida Wolden Bache to Norway's finance ministry, which is made public Friday. The fund says that level would still provide enough liquidity during periods of market turbulence while giving it more room to pursue higher returns in other parts of fixed income.

The reallocation would gradually reduce the share of U.S. Treasurys in the portfolio to 21.9% from 34.1%. It would also cut euro area government bond holdings to 14.1% from 16.8%, while increasing Japanese government bond exposure to 7.4% from 4.6%.

NBIM also wants to change how it weights government bond holdings, moving to market value from GDP. It argues that the shift better reflects conditions in developed economies, where debt burdens are now broadly high.

Market impact and return strategy

The proposal comes at a sensitive moment for the U.S. Treasury market, where long-dated yields remain near decade-highs as investors focus on the U.S. fiscal path and rising debt issuance. Economist Mohamed El-Erian says reliable buyers and holders of U.S. Treasurys are under pressure, pointing to Japan, China and Gulf countries, and adds that while NBIM's own reduction may be limited in size, the signal matters.

At the same time, the fund plans to raise its holdings of non-government U.S. fixed income, including corporate bonds, to 27.6% from 16.2%. Tangen and Wolden Bache say the portfolio can earn higher premiums by expanding into riskier assets such as mortgage-backed securities, which they view as suitable for a long-term investor and potentially useful in reducing volatility during market stress.

NBIM currently holds about $1.65 trillion in equities and $592 billion in fixed income. The fund has benefited from strong returns tied to large investments in U.S. and Asian technology stocks and AI-linked companies, but it also warns that such gains are unlikely to hold in a downturn; in the first quarter of 2025 it posts a $40 billion loss, and a recent NBIM stress test finds that an AI correction could erase $740 billion, or 35%, from the fund's value.

Our earlier coverage of the policy split around the Federal Reserve’s September decision highlighted how mixed signals from senior U.S. officials were clouding expectations for the next interest-rate move. We noted that comments ranging from holding rates steady to pushing for cuts or signaling further hikes quickly fed through to markets, moving Treasury yields and shifting the perceived odds of a September hike.

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