Norges bank might be preparing to wind down its allocations in all but three foreign currencies and their markets. It is not the best of time for Japan and other countries that could witness disruption in their bond market if the new proposals in Norway get a nod for its sovereign wealth fund. , this is the opinion of experts.
In its latest letter, the Norges Bank suggested restrictions on a fixed income as well as the corporate bond investments to be limited to the just three major currencies; namely Euros, British pounds and the US dollar. The new investment proposal if approved, will exclude twenty-three other countries’ currencies in which Norge Bank has had investments. This decision will particularly affect other currencies such as the Japanese yen, Canadian dollars, and the Swiss Franc.
Norges Bank’s Justification for Reducing Foreign Exposure
Norges Bank’s asset portfolio is more than $987 billion, with fixed income assets accounting for 30 percent of the asset; in fact, Norges Bank is the largest sovereign wealth fund in the world. However, the bank is winding down its foreign asset allocations on the premise it does not record decent gains from the diversification of its investments in bonds across multiple economies.
According to the bank, “in the long term, the gains from broad international diversification are considerable for equities but moderate for bonds. For an investor with 70 percent of his investments in an internationally diversified equity portfolio, there is little reduction in risk to be obtained by also diversifying his bond investments across a large number of currencies.”
Effect on Foreign Markets
Norges bank is a major player in the global bond market; many banks depend on the lead of the Norwegian outfit to benchmark their international exposure. Norge’s bank move to reduce its foreign exposure could remove a significant demand source from the global bond market and it might especially spell doom for the emerging markets of Africa and Asia.
The Institute of International Finance asserts that at the end of the first quarter this year, the emerging market grew to an amazing $56 trillion, which amounts to 218 percent of the gross domestic products of those countries. That means, it will affect the currencies and market debt of the emerging markets if demand reduces while supply continues to appreciate at the previously high rate.
Nonetheless, some players in the market believe that the time is right for a reduction in investment in the global bond market because of the high price of corporate bond. Some market commentators also believe that low yielding Asian bonds; precisely in South Korea and Singapore are overvalued
We observed that due to the low yield of Japanese governments bonds, the Japanese bonds will have market liquidity problems, which will discourage foreign investors from investing in the ten-year Japan government bond.
Although the decision is basically, profit-oriented, if the board eventually passes the proposal, it could be a bad omen for markets such Japan and set a pace precedence that other sovereign wealth managing banks can follow. Conversely, you can expect a significant increase in the demand for U.S. debt because the move by Norges bank passes a vote of confidence in U.S. Europe, and UK investments.