World's largest Sovereign wealth fund to cut U.S. treasury holdings

The bloodbath in the bond market keeps picking up speed along with the debasement trade.

Last week, the world’s largest sovereign wealth fund announced a plan to slash its government bond holdings by about 20 percent.

"We recommend that the government subindex of the bond index be reduced from 70 percent to 50 percent," Norges Bank governor Ida Wolden Bache and Norges Bank IM CEO Nicolai Tangen wrote in a letter.

"A government share of 50 percent will be ‌sufficient to ⁠cover the liquidity needs, including in periods of turbulence in financial markets."

Norges Bank Investment Management (NBIM) was founded in the early 1990s to invest Norway’s oil and gas wealth. It holds about $2.3 trillion in its portfolio.

U.S. Treasuries make up the bulk of Norway’s sovereign wealth fund bond holdings. According to Reuters, the fund will need to shed about $80 billion in Treasury holdings to accomplish its goal.

The fund will also reportedly divest around $20 billion in Japanese bonds and decrease holdings of euro-area bonds as well.

The Norwegian sovereign wealth fund did not announce a timeline for the move, but The Business Standard reported the transactions won’t likely occur until early 2027.

The announcement was yet another body blow to the struggling bond market. Many analysts believe we are in the early stages of a long-term secular bear market in bonds.

Over the last couple of years, long-term bond yields have faced persistent upward pressure. The 10-year Treasury spiked in 2022, rising from around 1.5 percent in late 2021 to a high of nearly 5 percent in the fall of 2023. Since then, yields have remained at those elevated levels despite the Fed cutting rates and geopolitical events that would have historically created significant safe-haven demand for Treasuries.

Reuters recently reported that “inflation, heavy government borrowing, policy uncertainty and bouts of stocks and bonds falling in tandem have weakened bonds' role as a ballast, prompting some investors to look for more diversification.”

The NBIM’s announcement is part of a broader trend as more people lose faith in government finances.

For decades, governments and central banks have held U.S. government debt as a “safe” asset. That is starting to shift because many governments no longer view U.S. debt as “safe.” They are concerned about the U.S.’s fiscal position, with constant deficit spending piling onto nearly $40 trillion in debt, along with the weaponization of the dollar. Notably, de-dollarization went into overdrive after the U.S. and its Western allies froze Russia's dollar-denominated assets after the invasion of Ukraine.

A Massif Capital note pointed out that many foreign government buyers have been slowly selling U.S. Treasuries over the last several years.

“Players like China are changing their approach and have been doing so for several years. China recently reduced its holdings to $652.3 billion, the lowest level since September 2008.”

Higher yields inherent in a bond bear market are already squeezing U.S. policymakers.

So far in fiscal 2026, the U.S. Treasury has spent $1.17 trillion on interest expense. That was up 15.5 percent compared to the same period in fiscal ’25. Interest on the national debt cost $1.2 trillion in fiscal 2025. That was up 7.3 percent over 2024.

Simply put, the federal government can’t afford higher interest rates.

In an effort to stop the bleeding, U.S. Treasury Secretary Scott Bessent announced a bond buyback at the long end of the yield curve.

It worked.

For about one day.

Vantage Point Asset Management CIO Nick Ferres told the Financial Post that “Debt and deficits are unsustainable in most of the advanced economies.” However, he cautioned against reading too much into Norway’s recent announcement.

“At some point there will be a fiscal crisis; however, this development is not necessarily a signal of that today.”