Norges Bank Investment Management, which runs the world's largest state investment pool, wants to shift its fixed-income book toward credit risk premiums and away from sovereign paper, a repositioning that would cut government debt to half of its bond holdings.
The manager of Norway's $2.4 trillion sovereign-wealth fund proposed cutting its government-bond allocation to 50% from 70%, a structural retreat by the world's largest state investor from sovereign debt as global yields hit multiyear highs.
"A 50% share provides a comfortable margin to cover liquidity needs, even at times of market turbulence, and holding more represents an implicit cost in the form of a lower expected return," Norges Bank Investment Management said in a letter to Norway's finance ministry. The remaining part of the fund's bond portfolio should provide exposure to more sources of risk premiums in the bond market, it added.
The proposal lands as a global government-bond rout pushes borrowing costs to levels not seen in decades. Germany's 10-year yield reached its highest since 2011, Japan's held above 3% for the first time in 30 years, U.S. 10-year Treasury yields touched their highest since November 2023 at about 4.8%, and UK gilts hit a post-2008 peak. The 30-year U.S. Treasury yield sits near two-decade highs. The sell-off reflects heavy government debt issuance, an oil-price shock tied to the closed Strait of Hormuz that has reignited inflation concerns, and expectations that central banks will keep policy tighter for longer.
The fund, valued at 22.683 trillion Norwegian kroner ($2.441 trillion) as of June 30, holds fixed income at just under 26% of total investments. The reallocation still requires approval from the finance ministry, which sets the fund's investment mandate, so the near-term market effect is limited. But the signal carries weight beyond the roughly $300 billion of bonds it would shift: Mohamed El-Erian, chief economic adviser at Allianz, told CNBC that traditional holders of U.S. Treasurys are becoming less reliable, pointing to the Norwegian fund's rethink as evidence. "The size isn't big, but the signal that traditional holders and buyers are becoming less reliable is a very important one," he said.
A buyer strike at the long end
The move reflects a deeper imbalance between issuance and demand. Governments are refinancing maturing debt at higher rates, straining public finances, while technology companies issue enormous amounts of debt to fund AI data centers, competing with sovereigns for investor capital. IMF Managing Director Kristalina Georgieva warned that high debt levels in advanced economies, combined with stubborn inflation, could push debt-service costs up for everyone, including low-income and emerging-market countries that had worked to compress spreads.
El-Erian said three G7 countries were particularly vulnerable to sovereign debt problems: the U.K., Japan and France. "Those by numbers, by everything else, and the U.K. in particular is what I call a high-beta country," he said, noting that every time U.S. rates move a bit, UK rates move by a lot more. He also flagged that France, not Italy, had become the eurozone's bond-market focal point.
For NBIM, the shift toward credit is a bet that risk premiums in corporate and other non-government debt will compensate for the lower expected return of holding sovereign paper. The fund said holding more than 50% in government debt represents an implicit cost. The finance ministry's decision, expected in the coming months, will determine whether the world's largest sovereign-wealth fund follows through on what would be its most significant fixed-income repositioning in years, and whether other large allocators read the same signal from a buyer that has historically anchored demand for government bonds.
This article is for informational purposes only and does not constitute investment advice.
