Top sovereign wealth fund may dump $80 billion in Treasury bonds — and load up on other types of U.S. debt with more risk

Norges Bank Investment Management, the world's largest sovereign wealth fund with assets totaling $2.3 trillion, is considering a significant shift in its U.S. debt holdings. In a letter to Norway's finance ministry, the fund's manager suggested offloading $80 billion worth of U.S. Treasury securities while increasing exposure to riskier forms of U.S. debt, such as mortgage-backed securities (MBS).

The primary reason for this shift is that MBS risk stems from the potential for homeowners to refinance at lower interest rates, benefiting borrowers rather than investors. This risk is mitigated by the issuance of MBS guarantees by mortgage giants Fannie Mae, Freddie Mac, and Ginnie Mae, whose credit quality is nearly equivalent to that of U.S. government bonds.

Following the proposed rebalancing, Norges Bank Investment Management would see its holdings of U.S. Treasuries reduced by 12.2 percentage points, while the share of non-government U.S. debt would increase by 11.4 percentage points. Despite the changes, the fund's overall exposure to dollar-denominated assets would remain largely unchanged at 52.5%.

The proposed rebalancing comes at a time when U.S. national debt has surged to $40 trillion, and the federal deficit is expected to reach $2 trillion this fiscal year. This comes amid a more aggressive U.S. administration, which has raised concerns about the potential risks associated with holding dollar assets, including the possibility of sanctions from Washington.