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Norway Caps Junk Assets as Wealth Funds Grow Cautious

Yngve Slyngstad, executive director of Norges Bank Investment Management. Source: Norges Bank via Bloomberg
Yngve Slyngstad, executive director of Norges Bank Investment Management. Source: Norges Bank via Bloomberg

Nov. 11 (Bloomberg) -- Norway’s government will require the country’s $520 billion oil fund to limit investments in junk-rated debt amid growing concern peripheral Europe’s fiscal crisis may be escalating.

The Government Pension Fund Global, the world’s second-biggest sovereign wealth fund, will next year be expected to try to cap its holdings of non-investment grade debt at 3 percent of its total fixed-income portfolio, said Bunny Nooryani, a spokeswoman at Norges Bank Investment Management, which runs the fund, in an e-mailed reply to questions. It will be the first time the Finance Ministry imposes such a cap, she said.

“It’s an uncertain outlook and sovereign wealth funds need to be cautious,” said Nigel Rendell, London-based senior emerging markets strategist at Royal Bank of Canada Europe Ltd., in an e-mailed reply to questions. “Euro concerns are returning and markets have risen strongly over recent months.”

Yields on Irish, Greek, Spanish and Portuguese debt have soared this month on concern the euro region may be unable to solve its worst debt crisis since the single currency was created more than a decade ago. Russia’s Finance Ministry on Nov. 3 told its two wealth funds to exclude Irish and Spanish debt from their bond holdings. Norway’s oil fund the following day said Spanish debt was becoming “less attractive.”

There may be “some consolidation going into the final weeks of the year,” Rendell said. “Debt spreads have narrowed significantly and there must be some debate about how much tighter they can go.”

Euro Decline

Concerns that Europe’s debt crisis may intensify prompted declines in the region’s single currency. The euro fell against 14 of its 16 most-traded peers, approaching the lowest in more than a month against the dollar. Europe’s single currency traded at $1.3701 at 12:40 p.m. in London.

Investors are also responding to demands by some European leaders that creditors foot part of the bill of bailouts. French Finance Minister Christine Lagarde said investors must share the cost of sovereign debt restructurings, backing a German call that helped send yields on Irish and Portuguese bonds to record highs.

“All stakeholders must participate in the gains and losses of any particular situation,” Lagarde said during an interview yesterday in Paris for Bloomberg Television’s “On the Move” with Francine Lacqua.

Junk Breakdown

Norway’s oil fund, which had 2.7 percent of its total debt holdings invested in junk-graded and un-rated fixed-income assets at the end of the third quarter, said in August it was buying up junk-rated Greek debt, signaling it didn’t expect the bailout-reliant euro nation to default.

The fund’s junk and un-rated debt holdings rose 10.4 percent in the first nine months of the year to 32.5 billion kroner ($5.5 billion), while remaining at about 2.7 percent of the total. Of that, 18.9 billion kroner was in securitized debt, 6.95 billion kroner was in corporate bonds, 5.6 billion kroner was in government and government-related debt and 588 million kroner was in inflation-linked bonds, the investor’s third-quarter report shows.

Chief Executive Officer Yngve Slyngstad said in a Nov. 4 interview that while the fund’s view on Spanish debt had become more positive at the start of July, price developments since then had made Spanish debt less attractive.

Irish 10-year securities plunged for a 13th day. Ten-year Portuguese yields rose 6 basis points to 7.24 percent at 12.21 p.m. in London. That widened the yield premium over benchmark German bunds to as much as 484 basis points, a record, according to Bloomberg generic data. Greek and Spanish bonds also fell. Yields move inversely to bond prices.

‘Increased Worries’

“The high-yield market has been very ‘on or off’ during the last six months on the back of PIIGS worries so timing has been very important,” said Fabian Qvist, head of flow credit sales and trading at Oslo-based Arctic Securities, in an e-mailed reply to questions. “The increased worries we are seeing in the market place surrounding Ireland today and the resulting spread widening in the European high yield indices clearly depicts this phenomenon.”

The cap on junk-graded debt will back up other measures designed to curb risk-taking at the fund, the Finance Ministry said. As of Jan. 1, the fund will also be required to tighten the range by which it can deviate from the benchmark it tracks. The scope for management, measured as an estimated tracking error, will be cut to 1 percentage point from 1.5 percentage points.

Credit Risk

“Credit risk is a risk that by experience is not necessarily captured well in measures of expected tracking error,” said Paal Haugerud, deputy director general at the Finance Ministry’s asset management department, in an e-mailed reply to questions. That suggests “that one should supplement with other measures to limit risks in bond investments.”

Placing a limit on non-investment grade bonds “is an appropriate supplement to the other requirements for management, measurement and control of risk in the Fund,” Haugerud said.

The Norwegian fund, Europe’s biggest equity investor, is built from oil and gas revenue and invests abroad to avoid overheating the domestic economy. It allocates 60 percent to stocks, 35 percent to bonds and 5 percent in property. Only Abu Dhabi has a larger fund, according to the Sovereign Wealth Fund Institute in California.

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

To contact the editor responsible for this story: Tasneem Brogger at tbrogger@bloomberg.net

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