Norges Bank slashes exposure to US government bonds

Norges Bank Investment Management (NBIM), the investment manager of Norway's sovereign wealth fund, the Government Pension Fund Global, has proposed a major restructuring of the fund's exposure on US government bonds.

"We consider that the three roles remain appropriate, but that they can be weighted somewhat differently in the composition of the benchmark index than they are today," NBIM said.

NBIM, from its analysis, suggested to reduce government bonds exposure by reducing the government sub-index of the bond index from 70% to 50%, while increasing its exposure on US corporate bonds as well as mortgage-backed securities where previous exposure were zero.

The proposal is a response to the Ministry of Finance's letter earlier this year questioning on bond, including to reduce fluctuations in portfolio, increase liquidity and risk premiums in the bond market, NBIM said the fund should venture into corporate bonds and mortgage-backed securities moving forward.

It mentioned that the credit quality of corporate bonds is close to that of US government bonds and the segment has historically provided a risk premium related to prepayment risk.

"The most important changes from today's index are a considerably lower share of government bonds and the inclusion of mortgage-backed securities, which account for around 13% of the recommended index against zero today," NBIM said.

NBIM also believes the reduction in the share of government bonds "does not necessarily materially weaken the bond portfolio's ability to reduce fluctuations in the fund."

The split between government bonds and other segments reflects the "trade-off" between the three considerations mentioned by the minister and "should therefore remain fixed over time."

"Norges Bank will revert with a specific proposal for how the bond index should be specified in the mandate once the Ministry has taken a position on the advice. We consider that the other limits and requirements for the bond portfolio, including the limit on the exposure to high-yield bonds and emerging markets in the active management, should be continued as today," it said.

"A broader index does at the same time place somewhat greater demands on the ongoing management of the fund. Norges Bank already has experience with several of the segments we propose to include."