Norway’s Folketrygdfondet, which manages the domestic and Nordic part of the country’s sovereign wealth fund, has announced it is now shutting down the Government Bond Fund (GBF) re-introduced as a COVID-19 crisis measure – even though high interest rates are now hitting company borrowing for different reasons.
Jørgen Krog Sæbø, the firm’s head of fixed income, said: “We anticipate that GBF will be liquidated by the end of 2025,” adding that this would happen both by bonds maturing as well as by sales.
“A large part of the bonds are due by 2025. Sales will be adapted to market conditions and take account of the way the market functions,” he said.
From now on, he noted, Folketrygdfondet will not invest in new bonds through the GPF, unless this helped to secure the financial values of existing investments.
When the pandemic broke out, he said, it became more expensive for companies to borrow money in the bond market, but after the fund was introduced – and beyond 2020 – such corporate borrowing became cheaper again. In 2021, rates had returned to pre-pandemic levels, he added.
Krog Sæbø said that when Norway locked down in March 2020 because of the COVID-19, many companies had feared they would lose access to capital and that the bond market would not be liquid.
The Norwegian government then tasked Folketrygdfondet with reprising the GBF – which had previously operatated for several years around the global financial crisis – with capital of NOK50bn (€4.8bn) as a crisis measure.
Krog Sæbø said Folketrygdfondet had invested just over NOK9bn of that amount, and made a total return on that of NOK357m by the end of the third quarter of 2022.
“In 2022, other challenges have arisen,” he said, in an article on Folketrygdfondet’s website.
“Rising interest rates, high uncertainty around the real economic development and the consequences of the war in Ukraine are again leading to higher interest rates in the bond market,” Krog Sæbø said.
However, he said, the bond fund had been intended as a temporary pandemic measure, and since market conditions were no longer affected by the pandemic, it was natural to think about liquidation.
The manager already said in March 2021 that it was reducing its activities for more secure borrowers.
But the fixed income chief said that because the bond fund had a financial goal to achieve the highest possible goal, and because it was not desirable to increase the uncertainty currently characterising the market, Folketrygdfondet would spend plenty of time winding down the fund.
It “should take place gradually and be adapted to market conditions”, Krog Sæbø said.
Folketrygdfondet’s main task is to run the NOK302bn Government Pension Fund Norway.
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