Norway’s Sovereign Wealth Fund Sold All U.S. Mortgage Bonds

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Norway’s $570 billion sovereign wealth fund sold all its holdings in U.S. mortgage-backed securities as part of a shift of its fixed-income portfolio.

The fund holds no mortgage bonds issued by Fannie Mae and Freddie Mac, the U.S.-controlled mortgage financiers, and an “insignificant” amount of private home loan-backed bonds, said Yngve Slyngstad, chief executive officer of Norges Bank Investment Management, today in an interview in Oslo.

“We’ve reduced our holdings of mortgage-backed securities,” he said. “MBS has been taken out of our internal policy benchmark. This means that we don’t have mortgage-backed securities issued by Freddie Mac and Fannie Mae any longer.”

The debt was sold primarily because of the refinancing risk, he said. In the U.S., when a borrower refinances a mortgage it can cut short the maturity of the bond backed by the loan and reduce the expected interest over time, so-called prepayment risk. The fund held 36 billion kroner ($6.6 billion) in bonds from Fannie Mae at the end of the second quarter and 11.5 billion kroner from Freddie Mac at the start of the year.

The change doesn’t include European covered bonds, Slyngstad said.

The fund’s bond holdings, which totaled $216 billion at the end of the third quarter, returned 3.7 percent in the third quarter, helped by gains in German and U.S. government bonds, the fund said today. The fund’s securitized debt, which was 18 percent of the portfolio, gained 0.3 percent as measured in international currencies.
Pimco Positive

Fannie Mae and Freddie Mac mortgage bonds fell earlier this week as the U.S. Federal Housing Finance Agency announced changes to guidelines for the government-supported companies’ refinancing program affecting so-called underwater borrowers.

The decline prompted Pacific Investment Management Co., manager of the world’s biggest bond fund, to call for investors to buy the bonds. Pimco boosted mortgage securities to 38 percent of assets in its $242 billion Total Return Fund in September, the most since January, from 32 percent the prior month, according to data on the firm’s website.

The spread Fannie Mae’s 6 percent 30-year mortgage bond and three-year U.S. Treasuries widened three basis points to 189 basis points as of 9:45 a.m. in New York.
Benchmark Changes

The fund announced today it has changed its internal benchmark portfolio, reducing it to 4,000 bonds from 11,500 bonds and keeping primarily corporate and government debt. The fund also weighted its euro government bond holding according to gross domestic product rather than the size of the market, which it had earlier proposed as a way of reducing its holdings in nations with increasing debt.

The investor, which is part of the central bank and gets guidelines from the government, held 55.6 percent in stocks, 44.1 percent in bonds and 0.3 percent in real estate at the end of the quarter. It’s mandated to hold 60 percent in stocks, 35 percent in bonds and 5 percent in real estate, which it first bought this year.

It got its first capital infusion in 1996 and has been taking on more risk as it expands globally, raising its stock portfolio from 40 percent in 2007. It first added stocks in 1998, emerging markets in 2000 and this year real estate to boost returns and safeguard wealth.

Norway, a nation of 4.9 million people, generates money for the fund from taxes on oil and gas, ownership of petroleum fields and dividends from its 67 percent stake in Statoil ASA (STL), the country’s largest energy company. Norway is the world’s second-largest gas exporter and the seventh-biggest oil exporter. The fund invests outside Norway to avoid stoking domestic inflation.

To contact the reporter on this story: Josiane Kremer in Oslo at Jkremer4@bloomberg.net