Norway's massive sovereign wealth fund is planning to cut its holdings of government bonds, primarily US Treasuries, as part of a strategic shift toward higher-yielding assets. The proposed rebalancing would increase allocations to other types of US bonds and mortgage-backed securities within the $2.3 trillion portfolio.

The fund has recently generated record profits from its equity investments, though it maintains a substantial exposure to technology and artificial intelligence sectors. According to a letter from Norges Bank Investment Management (NBIM) released publicly on Friday, the fund has proposed lowering the sub-index weight of government bonds within its fixed-income portfolio from 70% to 50%.

The fund indicated that this weight would provide sufficient liquidity during periods of market turmoil while freeing up capital to pursue better returns in other asset classes. Under the proposed reallocation plan, NBIM would gradually reduce its US Treasury holdings from 34.1% to 21.9%, decrease eurozone government bond exposure from 16.8% to 14.1%, and increase Japanese government bond holdings from 4.6% to 7.4%.

Given the elevated debt levels across virtually all developed economies, NBIM also intends to shift its weighting methodology for government bonds from GDP-based to market-capitalization-based weighting.

Where Treasury Markets Stand

The timing of this potential adjustment is particularly sensitive for the US Treasury market. Investors are increasingly concerned about America's fiscal outlook, with total government debt having surpassed $40 trillion, driving yields higher. Economist Mohamed El-Erian stated during a Friday interview that "the stable buyers and holders of US Treasuries are under pressure," citing Japan, China, and Gulf nations among those affected.

Regarding the NBIM proposal to reduce Treasury holdings, El-Erian noted that "while the absolute scale of the reduction is not enormous, it sends a very significant signal: the willingness of traditional Treasury holders and buyers to allocate capital is weakening."

NBIM plans to increase its allocation to US non-government fixed-income assets, including corporate bonds, from 16.2% to 27.6%. Fund CEO Nicolai Tangen and Norges Bank Governor Ida Wolden Bache stated that the fund can capture higher risk premiums by investing in slightly riskier assets such as mortgage-backed securities, and as a long-term investor, it has the capacity to withstand the volatility associated with these instruments.

Tangen and Bache noted that mortgage-backed securities tend to move inversely to equities during crisis environments and, similar to government bonds but unlike corporate debt, can "further reduce portfolio volatility." The fund currently holds approximately $1.65 trillion in equities, representing nearly 1.5% of all listed companies globally, alongside $592 billion in fixed-income assets.

Established in 1998 to invest Norway's petroleum industry revenues, the fund operates under strict constraints designed to ensure its long-term sustainability. Through substantial investments in US and Asian technology giants, it has reaped significant returns from the current AI boom, with semiconductor stocks serving as a particularly important profit source.

However, Tangen has previously cautioned that the fund would face significant impacts during market downturns, and indeed experienced substantial losses in the first quarter of 2025 when market risk appetite declined. Recent stress tests conducted by NBIM indicate that if the AI sector experiences a correction, the fund's assets could shrink by as much as $740 billion, representing a potential decline of 35%.