The manager of Norway's sovereign wealth fund has proposed reducing the allocation to government bonds in its benchmark index from 70 percent to 50 percent, a shift that would trim its holdings of U.S. Treasuries from 34.1 percent to 21.9 percent of the bond portfolio.

Norges Bank Investment Management outlined the changes in a letter dated September 1 and sent to Norway's Ministry of Finance. The proposal would cut the fund's global government bond holdings by roughly $106 billion, with the largest portion coming from U.S. Treasuries, where exposure could decline by nearly $80 billion based on June-end figures.

Fund managers cited the need to generate higher returns while maintaining sufficient liquidity. A 50 percent government bond share would still cover liquidity requirements even during market stress, they said. The plan also calls for weighting government bonds by market value rather than GDP to better reflect current market conditions across developed economies.

The freed-up capital would shift toward non-government fixed income assets, including corporate bonds, mortgage-backed securities, and government-related debt. Within the U.S. segment, non-government debt would rise from 16.2 percent to 27.6 percent of the bond index, keeping overall U.S. dollar exposure nearly unchanged at around 52.5 percent.

The Government Pension Fund Global, valued at approximately $2.3 trillion, holds about 26 percent of its assets in bonds. Fixed income currently makes up a smaller share than equities, which dominate the portfolio.

The recommendations respond to a ministry request for analysis of the bond strategy. Officials will review the proposals, though any implementation would occur gradually and require government approval.

Similar adjustments have been discussed in prior years, but the latest letter represents the most detailed push yet to diversify within the bond allocation for improved risk-adjusted returns.