The manager of Norway's oil fund has proposed sharply reducing investments in U.S. government debt

Norges Bank Investment Management (NBIM), which manages the world’s largest sovereign wealth fund with $2.3 trillion in assets—the Norwegian Government Pension Fund, known as the Oil Fund—has proposed changing the structure of its bond benchmark. “We recommend reducing the weight of the government sub-index in the bond index from 70% to 50%,” states a letter from Norges Bank to the Norwegian Ministry of Finance.

According to the letter, this sub-index currently includes government bonds from developed countries—both conventional and inflation-indexed—as well as securities issued by supranational organizations. If the new benchmark structure is approved, the fund’s investments in U.S. Treasury securities could decline by nearly $80 billion, Reuters estimated. Bloomberg estimated the potential reduction at $75 billion. The ratio of stocks to bonds in the benchmark portfolio will remain unchanged at 70% to 30%. However, the share of government securities in the overall benchmark will fall from 21% to approximately 15%, according to calculations by Universal Asset Owners. It is proposed that country weights be determined not by the size of their GDP, but by the market value of their outstanding bonds.

Securities issued by supranational organizations, including the World Bank and the European Investment Bank, account for 3.7% of the current bond index; under the proposed changes, their share will be 3.6%, according to Norges Bank’s materials. They will remain in the benchmark but will be moved from the government sub-index to the non-government sub-index.

According to Norges Bank’s report, the most significant change is expected to be a decline in the share of U.S. Treasury bonds—from 34.1% to 21.9% of the bond index. The weight of U.S. non-government debt, by contrast, will rise from 16.2% to 27.6%. As a result, the overall share of dollar-denominated securities will remain virtually unchanged, falling from 52.9% to 52.5%. Dollar exposure will remain “virtually unchanged,” the Financial Times quotes an NBIM spokesperson as saying.

It is proposed to offset the reduction in the share of government bonds primarily by including mortgage-backed securities guaranteed by U.S. agencies—agency mortgage-backed securities, or agency MBS. Currently, they are not included in the benchmark, but they will account for about 13% of the proposed index. The share of other bonds linked to government entities will increase from about 4% to 11%, according to Norges Bank’s materials.

Agency MBSs entitle investors to cash flows from a pool of mortgage loans and are guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae. Ginnie Mae’s guarantee is backed by the U.S. government, while Fannie Mae’s and Freddie Mac’s guarantees are considered de facto federal obligations. The credit quality of these securities is “close to that of U.S. Treasuries,” according to a letter from Norges Bank. Therefore, as the FT notes, replacing Treasuries with such instruments would only moderately reduce the fund’s dependence on the creditworthiness of the U.S. government.

Investors expect to receive a premium on agency MBS for the risk of early mortgage repayment; however, the size of that premium may vary, and the premium itself may not materialize, Norges Bank warned. An appendix to the letter states that when interest rates fall, borrowers often refinance their loans: the holder of mortgage-backed securities receives the principal early and is forced to reinvest it at a lower expected rate of return. This premium was significant in the 1990s and until 2014, after which it weakened. However, it remained positive and statistically significant even in the later portion of the sample, the Norwegian central bank noted.

According to calculations by the Bank of Norway, as of June 30, 2026, the weighted-average yield to maturity of the proposed index would be 4.04%, compared with 3.99% for the current index. The difference is 5 basis points, or 10 basis points when adjusted for the new benchmark’s slightly shorter duration. Norges Bank cites agency MBS as the main source of the expected premium.

However, a retrospective calculation covering January 2015 through June 2026 did not show any advantage in terms of total return: the proposed index would yield an average of 0.76% per year in dollars, compared with 0.97% for the current index. However, its annual volatility would be slightly lower—5.57% versus 5.67%. The Norwegian Central Bank itself describes the projected outcome as “slightly higher expected returns and slightly lower volatility.”

Assessing the fund’s need for liquid assets makes it possible to reduce the government component. Norges Bank simulated 2,000 scenarios over a 50-year horizon using monthly data on U.S. stocks and bonds from 1973 to 2025. In the most challenging simulated scenarios, rebalancing required the sale of less than 40% of the bond portfolio.

However, the Central Bank still recommends allocating half of the index to government securities—in case of more significant stock market fluctuations, further growth of the fund, or the need to conduct transactions on a shorter time frame. “A 50% allocation to government bonds provides a comfortable buffer relative to the estimated upper limit of liquidity needs,” the letter states.

The Norwegian central bank’s proposal is advisory in nature, and “there are no guarantees that the fund will be allowed to make this change,” Bloomberg emphasizes. An expert group appointed by the Norwegian Ministry of Finance is to submit a report by January 25, 2027, the letter states. According to the FT, citing an NBIM spokesperson, the ministry plans to submit its final recommendations to parliament in the spring of 2027. Once the ministry has determined its position, the Bank of Norway is to prepare an implementation plan. The regulator noted in the letter that the transition to the new benchmark should be carried out gradually to limit the fund’s impact on the market and minimize transaction costs.

This article was AI-translated and verified by a human editor