Norway’s sovereign wealth fund, the world’s second largest, snapped up bonds from debt-ridden southern European countries to tap into higher yields.
“We have actually increased our exposure,” said Yngve Slyngstad, the head of Norges Bank Investment Management -- the central bank’s asset management arm -- in an interview in Oslo today. “You have a situation now where, even though the situation is difficult and will continue to be difficult, you get compensated with regards to the yields you are getting.”
European stress tests last month eased speculation that fiscal distress in Greece, Spain and Portugal may spread and prolong market turmoil. The Government Pension Fund Global, as Norway’s oil fund is known, lost 5.4 percent last quarter, or $25 billion, after its stock investments slumped 9.2 percent, it said today. Its bond holdings returned 1 percent.
“One thing is the measures that have been taken have been positive for the bond owners,” Slyngstad said. “Secondly, you get more yield relative to other countries, so the risk return we are looking at here is of course much more attractive.”
The yield premium investors demand to hold Greek 10-year bonds instead of benchmark German debt of similar maturity rose to more than 800 basis points today. That’s about 670 basis points more than the five-year average. In May, the difference surged to 965 basis points. The fund lost 3.4 percent on European debt holdings last quarter, compared with gains on bonds in the Americas and Asia.
Spain’s 10-year government bond yields 1.86 percentage points more than the German benchmark. That’s about 1.46 percentage points more than the average over the past five years. In June, that difference widened to as high as 2.2 percentage points. A basis point is 0.01 percentage point.
The $450 billion fund held 55 billion kroner in debt from Spain, Greece, Italy and Portugal at the end of 2009, down from 132 billion kroner at the end of 2008.
Some investors are returning to Europe’s sovereign debt market as they shift their focus to assess the risk of a sluggish global recovery stemming from a slowdown in the U.S.
“The latest economic data have shown that the clear story about Europe struggling more than the U.S. is not as much the perception now,” Slyngstad said.
Federal Reserve policy makers said this week that the “pace of the economic recovery is likely to be more modest in the near term than had been anticipated.”
U.S. government bonds represented the fund’s largest debt holding at 141.6 billion kroner, followed by U.K. and German government bonds, the fund said in a report today. Fixed-income investments in the Americas gained 6.8 percent in the quarter. Asian debt rose 9.6 percent.
The fund is built from Norway’s oil and gas revenue and gets its investment guidelines from the government. Earlier this year it got approval from the Finance Ministry to invest as much as 5 percent of its value in real estate.
The fund places its money outside Norway to avoid stoking domestic inflation. It had a 26 percent return last year, recouping most of 2008’s record loss of 633 billion kroner.
Only Abu Dhabi has a larger wealth fund, according to the Sovereign Wealth Fund Institute in California.