Norway's sovereign wealth fund has proposed reducing government bond holdings to 50% of its bond portfolio from the current 70%, as reported by Reuters. In a letter sent Tuesday to Norway's Ministry of Finance, Norges Bank Investment Management (NBIM) proposed lowering the weight of government bonds in its bond index benchmark from 70% to 50%. The proposal was signed jointly by Ida Wolden Bache, Governor of Norges Bank, and Nicolai Tangen, CEO of NBIM, in response to earlier questions from the Ministry regarding the role and weighting of the bond portfolio within the fund. The fund currently holds more than $615 billion in fixed-income assets, with 59.5% invested in government bonds as of June 30, but the latest proposal reveals a more aggressive timeline with US Treasury holdings specifically targeted for a 34.1% to 21.9% reduction. Within that broader shift, exposure to US government bonds specifically is set to fall from 34.1% to 21.9% of the total bond benchmark index, representing a 36% reduction in relative terms once the new market-value weighting replaces the current GDP-based one.
The proposed restructuring would reduce the fund's allocation to global government bonds by approximately $106 billion, with the largest portion coming from US Treasuries, according to Reuters calculations. US Treasury holdings would see a $80 billion decrease, while Japanese government bonds could increase by 2.8 percentage points. Under the proposal, the fund's share of US Treasury bonds would fall by 12.2 percentage points, while its holdings of non-government US fixed-income instruments would rise by 11.4 percentage points. The rebalancing would see increased holdings in higher-yielding, higher-risk fixed-income instruments, particularly US agency mortgage-backed securities (MBS) guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae. The fund's current US investment share is already lower than the weight assigned to the United States in most global benchmarks. Agency MBS would move from zero today to around 13% of the new benchmark, given their scale and close-to-sovereign credit quality through Fannie Mae, Freddie Mac and Ginnie Mae guarantees. Government-related bonds, covering supranationals, federal agencies and municipalities, would rise from about 4% to around 11% of the index.
The proposal comes amid long-term government bond yields in the United States and other G7 countries surging to levels not seen since before the 2007 financial crisis, raising concerns about borrowing costs for nations already burdened by heavy debt loads. As reported by Reuters, the fund's rationale centers on diversifying return sources and harvesting a broader set of fixed-income risk premia rather than concentrating solely on government bonds. The fund's objective is to provide exposure to additional sources of risk premiums while maintaining sufficient liquidity during market stress. A spokesperson for NBIM clarified that the objective of the change is to diversify return sources, with the fund's exposure to the US dollar remaining "essentially unchanged" under the proposal. The fund's US investment share is already lower than the weight assigned to the United States in most global benchmarks. The bank argues a 50% government share still leaves a comfortable margin over the fund's estimated liquidity needs, even in stressed markets, so the diversification benefit isn't seen as lost, just rebalanced.
Fund leaders highlight that mortgage-backed securities could reduce volatility during crises, complementing equities and government bonds, as reported by Reuters. This move comes amid rising U.S. Treasury yields and concerns over fiscal sustainability, signaling a shift in traditional bond-buying patterns. The proposal represents a strategic pivot as Norway's wealth fund seeks to optimize returns amid changing market dynamics and evolving risk premium opportunities, with the fund investing exclusively in foreign markets and its assets exceeding $2 trillion. The headline takeaway is directional rather than final: less concentration in plain US Treasuries, more spread across dollar-denominated mortgage and agency debt, all inside a fund whose Treasury holdings run into the hundreds of billions of dollars. The structure of agency MBS today is not exactly similar to what the market saw during the Global Financial Crisis, as agency MBS is today a standardised and liquid segment. The segment was removed from the bond index in 2012, and during the financial crisis, NBIM had exposure to private mortgage-backed securities through external mandates that became illiquid and difficult to manage.
The recommendation responds to a Ministry of Finance letter dated 25 February 2026, which had asked NBIM to reassess the roles bonds play in the fund and the structure of the benchmark index. None of this takes effect automatically, as NBIM's letter is advisory. Norway's Ministry of Finance has to weigh the recommendation, and a separate government-appointed expert group is still due to deliver its own broader report by 25 January 2027, one that could examine the fund's purpose and risk tolerance in ways that might further influence how the bond index eventually looks. The total US dollar exposure stays close to unchanged at around 52.5% under the proposed index, from 52.9% currently, with the composition beneath that dollar exposure changing significantly through the shift from plain Treasuries to mortgage-backed securities and government-related debt.
