Big bond shake-up ahead? Norway’s $2.3 trillion fund may slash Treasury holdings by $75 billion

A proposal by Norway’s sovereign wealth fund to sharply reduce its allocation to government bonds could reverberate through global debt markets, especially the US Treasury market. The $2.3 trillion fund, the world’s biggest, wants to diversify its risk exposure and boost returns by cutting the share of government debt in its bond holdings, Bloomberg reported.

Norges Bank Investment Management, which is considered to be the world's largest wealth fund, said in a letter sent to the Ministry of Finance on Tuesday and published on its website on Friday that government debt should be cut to 50% of bond holdings from 70%. There is, however, no guarantee that the fund will be allowed to make the change. As of June 30, about 30% of the fund was invested in bonds, with more than $615 billion of fixed-income assets in its portfolio.

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What the proposal says

According to the latest figures on the fund’s website, about 59.5% of its fixed-income assets were invested in government bonds. Adding government-related bonds takes that allocation to 69%. In its letter, NBIM said, “The remaining portion of the bond allocation should provide exposure to more sources of risk premiums.” According to Bloomberg data, reducing the share of government bonds to 50% would imply a decrease of about $58 billion of such bonds.

How it could affect US Treasuries

The proposed change would imply a $75 billion drop in holdings of US Treasuries, while holdings of Japanese government bonds could increase by $20 billion. Holdings of euro area government bonds are also projected to decrease.

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Treasuries were little changed in London trading on Friday after a week under pressure. The US 10-year yield topped 4.75% on Monday for the first time since January 2025 as rising oil prices bolstered expectations that the Federal Reserve will hike interest rates. Investors have also been grappling with worries over the size of the US government debt pile while assessing how aggressively the Fed will need to raise rates to fight inflation.

‘Step in the right direction’

“It’s a step in the right direction, but would be more of a backroom decision, as it would not require the lengthy review and public approval process that changes to the overall debt-equity allocation typically entail,” said Karin Thorburn, a Norwegian School of Economics professor who has served on numerous committees related to the fund’s investment strategy.

“It’s the second-best option, because I think it would be better to adjust the overall portfolio allocation by increasing equities and reducing bonds,” she added.

State Secretary Ellen Reitan said the government will “address any proposals for adjustments to the investment strategy in the white paper on the fund, which will be presented to the parliament in the spring” after the Finance Ministry “will thoroughly review the recommendations”, in an emailed comment.

Fund’s broader strategy

NBIM was founded in the early 1990s to invest Norway’s oil and gas wealth and has limited scope for active investing. Its holdings are spread across equities, fixed income, real estate and renewable infrastructure, all outside Norway. Real estate is a growth area in its new strategy.

The proposal marks a significant possible shift in the fund’s bond strategy, with the potential for a sizeable reduction in US Treasury holdings, but the recommendation must first go through a government review process before any change is decided.