The world’s largest sovereign wealth fund is turning to mortgage-backed securities to boost returns. Its dollar exposure would remain nearly unchanged
This isn’t a retreat from America, but it is a signal to the US Treasury. The world’s largest sovereign wealth fund has proposed cutting its allocation to Treasury bonds by nearly $80 billion, at a time when US federal debt has surpassed $40 trillion and markets are paying closer attention to the cost of financing it.
Norway would keep investing heavily in dollars, but would shift part of that money away from government bonds and into mortgage-backed securities. The fund has presented the move as a technical adjustment rather than a political stance against the Trump administration, but it lands amid a growing debate over the sustainability of US debt and the erosion of the traditional safety premium long attached to Treasuries.
Government bond weighting cut from 70% to 50%
Norges Bank Investment Management, the central bank arm that runs the Government Pension Fund Global, has proposed to the finance ministry that government bonds’ weighting in its fixed-income benchmark be cut from 70% to 50%.
According to Reuters calculations, the change would mean a reduction of nearly $80 billion from the roughly $215 billion the fund held in Treasuries at the end of June. Any shift to the new index would happen gradually, to limit transaction costs and market impact.
The Norwegian fund, built on the country’s oil and gas revenues, holds more than $2 trillion in total. Its sheer size means any strategic shift draws close scrutiny from international investors. The final call, though, doesn’t rest with the fund’s managers: what has been sent to the government so far is only a recommendation.
Concerns over US debt
Norges Bank doesn’t tie the proposal directly to Trump’s policies. Even so, its leadership has for some time flagged the risks tied to rising sovereign debt worldwide, including in the United States. Last January, the fund’s chief executive, Nicolai Tangen, noted that public debt is now high both in absolute terms and relative to GDP.
The proposal comes as a growing supply of bonds, inflation worries and economic uncertainty have kept long-term yields elevated. According to the OECD, tradeable bonds issued by central governments of member countries hit a record $61 trillion in 2025, with that figure expected to rise to 85% of aggregate GDP in 2026.
In the United States the issue takes on a particular scale: federal debt has passed $40 trillion, and the fiscal 2025 deficit came in at 5.9% of GDP. Treasury Secretary Scott Bessent aims to bring that down to 3%, but Federal Reserve board member Christopher Waller has noted that even a deficit of that size wouldn’t be enough to durably reduce the debt burden.
Waller has also argued that the premium historically attached to Treasuries for their safety and liquidity has largely eroded, a view that helps explain the Norwegian proposal: for an investor with an extremely long time horizon, holding such a large share of government bonds comes at a cost in terms of expected returns.
No flight from the dollar
The revision would not amount to “de-dollarization.” Under the new index, US government bonds’ weighting would fall from 34.1% to 21.9%, while non-government US bonds would rise from 16.2% to 27.6%. The dollar’s overall share of the fixed-income benchmark would barely move, dipping from 52.9% to 52.5%.
The plan shows just how hard it is, even for the world’s largest sovereign investor, to escape the gravitational pull of US financial markets. The fund would cut the credit it extends directly to the Treasury, but would still channel roughly half of its bond portfolio into the United States.
At the center of the overhaul are agency mortgage-backed securities, built on pools of home loans and guaranteed, depending on the issuer, by Fannie Mae, Freddie Mac or Ginnie Mae. The first two are government-sponsored enterprises that have been under federal conservatorship since 2008; only Ginnie Mae securities carry the full, formal backing of the US government.
These instruments offer somewhat higher yields than Treasuries because they carry the risk of early loan repayment, for instance when falling rates make refinancing attractive. Norges Bank argues their credit quality nonetheless remains close to that of federal government bonds.
The return of mortgage-backed securities
Mortgage-backed securities were dropped from Norway’s benchmark back in 2012. During the financial crisis, the fund had held private mortgage-backed securities through external managers, and those assets became illiquid and difficult to manage.
Norges Bank now draws a clear line between those products and agency MBS, a market worth roughly $7.5 trillion at the end of 2025, with average daily trading volume around $350 billion. Based on the central bank’s own analysis, these securities have historically offered a premium tied to prepayment risk and have shown a negative correlation with equities during periods of market turmoil.
The revision would also reshape the geographic breakdown of the fund’s government bond holdings. Eurozone government bonds would fall from 16.8% to 14.1%, while Japan’s share would rise from 4.6% to 7.4%; the UK’s weighting would stay unchanged at 4.2%.
None of this reflects country-by-country judgment calls. Oslo is proposing to move away from GDP-based weighting toward a weighting based on the value of bonds outstanding, bringing the benchmark closer in line with the Bloomberg Global Aggregate index. The rationale is that high public debt has become common across developed economies rather than the anomaly of just a handful of countries.
The decision rests with the government
A panel of experts appointed by the government is due to submit its report by January 25th 2027. According to the Financial Times, the ministry will then present its own recommendations to parliament in the spring of that year. Only after these steps play out will it become clear whether, and in what form, the shift will actually begin.
Norges Bank’s stated goal is to make full use of the fund’s long investment horizon: keeping enough liquidity on hand for times of crisis while seeking higher returns elsewhere in the bond market.
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