New Headwind for U.S. Treasuries! Norway's Sovereign Fund Proposes Cutting Government Bond Weight to 50%, Reducing U.S. Debt Holdings by $80 Billion

According to recent foreign media reports, Norges Bank Investment Management (NBIM), the world's largest sovereign wealth fund, has formally written to Norway's Ministry of Finance proposing a significant reduction in the weight of government bonds within its benchmark bond index—from the current 70% down to 50%.

The Financial Times reports that if this adjustment is approved, it would result in NBIM reducing its global government bond portfolio by approximately $106 billion, with the vast majority coming from U.S. Treasuries—around $80 billion. Currently, NBIM manages Norway's sovereign wealth fund with total assets reaching $2.3 trillion, of which nearly 26% is allocated to fixed-income instruments.

In its letter, NBIM explained that a 50% allocation to government bonds is sufficient to meet liquidity needs, including requirements for asset liquidation during periods of financial market turmoil. The remaining funds will be redirected toward assets offering higher risk premiums, primarily mortgage-backed securities (MBS) guaranteed by U.S. government-sponsored enterprises such as Fannie Mae and Freddie Mac. These MBS instruments have credit quality close to U.S. Treasuries but offer slightly higher yields due to prepayment risk. Following the reallocation, the share of UK bonds will remain unchanged, Japanese bonds will increase by 2.8 percentage points, and the dollar-denominated portion will decrease only slightly by 0.5 percentage points.

An NBIM spokesperson emphasized that the letter constitutes a 'proposal' only, and the final decision will depend on the Ministry of Finance submitting a formal plan to parliament in spring 2027.

This proposal comes amid dual pressures on global bond markets: on one hand, rising government debt levels globally have sustained a wave of bond sell-offs throughout the year; on the other, escalating tensions between the U.S. and Iran have reignited inflation concerns, with rising energy costs putting upward pressure on long-term yields.

Despite multiple interventions by U.S. Treasury Secretary Bessent in the Treasury market this summer, yields remain at multi-year highs. Padhraic Garvey, Head of Research for the Americas at ING, noted that the energy shock is not temporary, and underlying structural changes may continue to push inflation higher.

Meanwhile, HSBC has raised its full-curve forecast for U.S. Treasury yields. Dhiraj Narula, HSBC's U.S. interest rate strategist, stated that due to expectations of a more hawkish monetary policy path and a structurally higher floor for long-term yields, the bank has revised its year-end 2-year Treasury yield forecast from 3.85% to 4.20%, and the 2025 year-end forecast from 3.5% to 3.95%. The 10-year yield forecast for year-end has been raised from 4.3% to 4.65%, with a 2025 year-end outlook of 4.75%.

Emma Moriarty, Portfolio Manager at UK-based CG Asset Management, believes the global economy has shifted from deflationary momentum to inflationary momentum, with tariffs and Middle East conflicts serving as direct manifestations of this structural transformation.

The simultaneous emergence of Norway's proposal and HSBC's yield forecast revision signals a broader trend: traditional large buyers are now demanding higher risk premiums, while sell-side institutions are collectively raising their baseline expectations for yield floors.

Although the $80 billion divestment plan remains a non-binding proposal until the Norwegian Ministry of Finance makes a final decision, the strategic shift toward 'de-risk-free' positioning by long-term capital is now clearly emerging.