Norway’s $2.3 trillion sovereign wealth fund is reportedly considering reducing roughly $80 billion of U.S. Treasury exposure while increasing its holdings of mortgage-backed securities, allowing the fund to diversify away from American government debt by purchasing American government-supported debt connected to suburban kitchens.
The strategy has been praised as a sophisticated example of institutional risk management, in which investors replace one claim ultimately dependent on the United States with another claim ultimately dependent on the United States, except this one comes with homeowners, refinancing risk and granite countertops.
“Diversification is about ensuring you are not overly exposed to any single source of risk,” said one portfolio strategist, before moving $10 billion from something guaranteed by Washington into something guaranteed by an agency in Washington.
Mortgage-backed securities also offer higher yields than Treasuries, compensating investors for accepting additional complexity, duration risk and the possibility that Americans will refinance their mortgages at exactly the least convenient moment.
The fund stressed that the move should not be interpreted as a loss of confidence in U.S. government debt.
It merely prefers U.S. government debt after it has been run through the housing market and made harder to explain.
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