Norwegian sovereign wealth fund may cut $80 billion US Treasury holdings; high-rated mortgage securities expected to become new favorites

According to Jinse Finance APP, Norway's sovereign wealth fund, with assets totaling $2.3 trillion, has recommended cutting its holdings of government bonds and reallocating funds to higher-yielding fixed income assets. Norges Bank Investment Management (NBIM) has proposed reducing the share of government debt in the fund’s bond benchmark from 70% to 50%. It is estimated that this adjustment could result in a roughly $106 billion decrease in global sovereign bond holdings, with US Treasury holdings alone dropping by nearly $80 billion.

The fund will shift most of these funds into assets such as agency mortgage-backed securities. These bonds are backed by Fannie Mae, Freddie Mac, or Ginnie Mae, so their credit quality is similar to US Treasuries, but they typically offer higher yields to compensate investors for the risk that homeowners might prepay their mortgages.

For investors, this proposal highlights again that as government borrowing keeps rising and yields remain high, large institutional investors are demanding greater returns from their bond portfolios. Cutting $80 billion in US Treasury holdings is not a large amount relative to the vast US Treasury market, but if other reserve management institutions take similar actions, it could weaken overall demand for US Treasuries and push yields even higher. This shift also means that high-grade mortgage-backed securities may become a more attractive alternative to government bonds.

These adjustments will leave the fund’s overall US dollar asset exposure largely unchanged. Its weighting in US Treasuries will drop by 12.2 percentage points, while the share allocated to other US fixed income securities will rise by 11.4 percentage points. Holdings of UK government bonds will remain the same, while the weighting of Japanese sovereign debt will increase.

NBIM has also suggested assigning weightings to government bonds based on the amount of each country’s outstanding government debt, rather than the size of their economies. The fund stated that these broader reforms would further diversify its fixed income returns, while maintaining ample liquidity during times of market stress.

This recommendation has not yet been finalized. According to reports, an expert committee is expected to submit a broader proposal to Norway's Ministry of Finance by January next year, and the Norwegian government plans to submit related proposals to parliament in the spring of 2027.

Since the start of this year, the long end of the US Treasury yield curve has continued to rise, driven by persistent inflation, increased uncertainty over whether the Federal Reserve will raise rates to curb inflation, and heightened concerns among investors about holding long-duration bonds. In addition, a widening US federal fiscal deficit, and significant bond issuance by tech companies to fund AI expenditures, which competes with sovereign bonds, are also key factors behind the continued upward movement in the long end of the yield curve.

After last week's significant volatility, US Treasury investors are preparing for yet another potentially turbulent trading week. In the first week following Labor Day, two key events will take center stage: on Wednesday, the US Treasury Department will reveal details of an expanded bond buyback program set to launch the next day—potentially double or more the previous cap; and on Friday, the August inflation data will be released, which Federal Reserve Chair Kevin Walsh and his colleagues view as a crucial deciding factor for whether to raise rates this month.

Investors will have to digest both of these conflicting forces this week. Short-term Treasuries could come under pressure if rate-hike expectations intensify, while long-term Treasuries may find support from the backstop provided by the buyback program—the shape of the yield curve will depend on which force prevails.