There’s a Global Bond Rout Taking Place and Norway Wants to Cut Its Treasury Holdings

The world’s biggest sovereign wealth fund wants to reduce its exposure to global government bonds. (AFP via Getty Images)

Key Points

• Norway’s sovereign-wealth fund proposes cutting its U.S. Treasury bond holdings to boost returns and limit risks in its $2.3 trillion portfolio.
• The fund proposes reducing its U.S. Treasury holdings to about 21.9% of its overall fixed income portfolio from the current level of around 34.1%.
• The proposal also would reduce the fund’s overall government bond exposure to 50% from 70% through smaller cuts in European and Japanese debt.

The world’s biggest sovereign-wealth fund has proposed a major cut to its U.S. Treasury bond holdings as markets around the world grapple with higher interest rates, surging debt levels, and increasing levels of intervention from government officials that have rattled investor sentiment.

Norges Bank Investment Management, Norway’s sovereign-wealth fund and the biggest in the world, has proposed slashing its exposure to U.S. debt markets as part of a broader effort to boost returns and limit risks in its $2.3 trillion portfolio.

The group told Norway’s finance ministry that it wants to take U.S. Treasury holdings to around 21.9% of its overall fixed income portfolio from a current level of around 34.1%, through “gradual” sales that won’t disrupt markets. That equates to an overall reduction of around $80 billion of its $215 billion in Treasury holdings.

Smaller reductions in European government bonds, as well as those issued by Japan, would reduce its overall government bond exposure to 50% from 70%.

“A government share of 50% will be sufficient to cover the liquidity needs, including in periods of turbulence in financial markets,” said Norges Bank governor, Ida Wolden Bache, and CEO Nicolai Tangen in a joint letter to parliament.

Global government bond yields have surged this year, with 30-year U.S. Treasury bonds trading at the highest yields since 2007 and recent auction costs rising to the highest since 2001.

Longer-dated Japanese government bonds also have been trading at the highest levels since the mid-1990s, while debt issued by governments in Germany, France, and the United Kingdom have all touched multi-decade highs.

“The jump in yields is global,” said David Morrison, senior market analyst at Trade Nation.

“Investors are looking at government debt levels and ever-rising fiscal deficits as countries seem incapable of taking the difficult decisions needed to reduce spending, or raise taxes, to get their respective houses in order and calm markets,” he added. “In addition, governments also have to compete with corporate giants, in particular those responsible for building out AI infrastructure.”

Overall government debt levels are surging, as well, with the U.S. topping the $40 trillion mark late last month. The Institute of International Finance reported earlier this year that global debt levels hit a record $353 trillion, or 305% of world GDP.

The market moves also have elicited major responses from the official sector, with U.S. Treasury Secretary Scott Bessent unveiling plans for increased long bond buybacks over the coming months in order to lower government borrowing costs and “slow things down” in order to ensure that “the market doesn’t get disorderly.”

Bessent also has supported yen intervention from Japan’s finance ministry, which has sought to stem the currency’s long decline amid what some investors see as reluctance from the Bank of Japan to raise interest rates and damage the economic agenda of Prime Minister Sanae Takaichi.

But that tinkering, argued Jonas Goltermann at Capital Economics, can only take governments so far if the central issues behind the global bond market slump remain unaddressed.

“While policymakers may seek to ease strains through debt-management adjustments or carefully calibrated market interventions, they appear much less willing to undertake the fiscal tightening needed to put public finances on a clearly sustainable path,” he said.

“As a result, we expect term premia to remain elevated and bond markets to remain susceptible to renewed bouts of volatility in the quarters ahead,“ he added.

Write to Martin Baccardax at martin.baccardax@barrons.com

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