Norway’s sovereign wealth fund sells US Treasuries: debt under pressure

At the end of a turbulent week for public debt on international markets, news has emerged that confirms investors’ unease. The Norwegian sovereign wealth fund, Norges Bank – the world’s largest institutional investor – has decided to reduce its exposure to government bonds, particularly US ones. The fund’s board has proposed reducing the proportion of government bonds in its portfolio from 70 per cent to 50 per cent. The reduction in Treasuries would amount to around $80 billion, falling from the current $215 billion to approximately $135 billion. This represents a significant blow to U.S. debt, which is already under pressure, and to the Trump administration, which will need to address the reasons behind such a loss of confidence ahead of the mid-term elections. Overall, Norges Bank Investment Management intends to cut approximately $130 billion in government bonds worldwide, thus confirming that the sell-off seen on the markets at the start of the week may only be the beginning of a shake-up in global public debt. The United States is at the centre of investors’ sell-offs. This is all the more so given that Norges’ exposure to dollar-denominated assets remains unchanged, as the capital divested from sovereign bonds will be reallocated to non-government bonds. As if to say: we have more confidence in American companies than in Trump.

In recent days, Treasury Secretary Scott Bessent had complained at the G20 that the “world is drowning in debt”, thereby reigniting investor anxiety. The sell-off of government bonds has affected various sectors almost indiscriminately and was driven primarily by expectations of monetary tightening by central banks to combat inflation. Higher interest rates mean a higher cost of borrowing. However, various market reports – whilst continuing to emphasise the seriousness of the issue in the context of a rate rise – have also highlighted some nuances. One cannot lump everything together.

Lorenzo Codogno (London School of Economics), for example, observes in the opening lines of his latest newsletter that Europe as a whole is not the epicentre of the global debt crisis. “Far more serious risks,” says Codogno, “actually stem from other regions, namely the United States and Japan.” RBC BlueBay, an investment firm owned by the Royal Bank of Canada, also explains that “despite the background noise”, European public debt as a whole is in a better position than in other regions. This is because aggregate debt levels are lower than those of the United Kingdom, Japan and, in particular, the United States. Furthermore, the ratio of debt servicing costs to tax revenue, explains RBC, “is much lower in the Eurozone, where it ranges between 1 and 10 per cent, compared with the United Kingdom and the US, where this ratio already exceeds 20 per cent”. Furthermore, it must be borne in mind that Greece and Portugal have improved their financial positions; that in Italy, although the debt-to-GDP ratio remains high, the Meloni government’s approach has borne fruit; and that in France, RBC concludes, despite public finances being under pressure, “we have noted a fiscal consolidation-oriented approach from Le Pen, who is considered the favourite in the polls for the next French presidency”. In short, Europe is in a better position than others when it comes to the sustainability of public debt. So much so that Norges Bank has made its choice.