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 biggest sovereign wealth fund with $2.3 trillion in assets, proposed reshuffling its U.S. debt holdings away from Treasuries.

In a letter to Norway’s finance ministry on Tuesday, the fund’s manager recommended slashing government debt in its benchmark bond index. That would result in $80 billion of U.S. Treasury securities being offloaded.

But the reduction in Treasuries would be mostly offset by purchases of riskier forms of U.S. debt, including mortgage-backed securities.

The fund pointed out that MBS risk is not from the threat of default. Instead, it’s because mortgages can be refinanced at a lower interest rate, benefiting borrowers over investors. So MBS debt entails a prepayment premium to account for this risk.

“Norges Bank’s advice is that securitized bonds (including mortgage-backed securities, so-called agency MBS) and government-related bonds should be included in the bond index,” the fund’s letter said. “A broad market index provides exposure to more risk premiums and gives a more diversified benchmark index than today.”

It...