The US Paper Dump Continues: Norway's Sovereign Wealth Fund Sells All Of Its US MBS Exposure
Two days ago we noted that foreigners are selling US paper at a record pace, whether to raise capital in a locked out liquidity environment like French banks, or to make a politicial statement, like China. Today we get the first confirmation to this from Norway's Sovereign Wealth fund, best known for its prediction that it would buy and hold Greek bonds in perpetuity back in September 2010. Just recall: "Norway has taken the view that [Greek bonds] will not [default]. The Greek holdings are particularly interesting because the consensus in the market is that they will at some point restructure or default." Well, about a year later it is now official that the best the Norway SWF can hope for is a 50% recovery. So what does it do? It proceeds to dump US paper. Mortgage Backed Securities first. Because if it announced that a sovereign wealth fund instead of buying into the biggest ponzi ever, we finally defecting from it, then all bets would be of. Bloomberg reports: "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 stated reason for the dump: prepayment risk: "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 real reason? Why shoring up capital of course. "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." And with the Fed telling us that almost $100 billion in US bonds and MBS having been sold in the past two months, one can be absolutely certain that i) it is not just MBS and ii) it is not just Norway.
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.
This is bad news for PIMCO just as the fund was preparing for an MBA-based QE3 launch and buying up every MBS out there. Although judging by the Norwegian's success at predicting markets, the dump may in fact merely bolster PIMCO's thesis.
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.
And some more color on the fund administering the trade surplus of what some consider Europe's best run country:
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.
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.
While Norway may me lucky, its sovereign wealth fund sure isn't. And we venture to say, it isn't the only one.