Norway's SWF Says Europe's Bond Market Promises a Strong Recovery

(December 9, 2010) — Norway’s $510 billion sovereign wealth fund says it’s accurate in its bet that Europe will emerge from the debt crisis, with the region’s bond markets promising to deliver a “strong” recovery.

Yngve Slyngstad, head of the Norges Bank Investment Management, told Bloomberg that going forward he believes the European bond market will be strong and healthy. “This year, you’re actually getting compensated to a larger extent for the risk that is obviously there, so we’d rather say we’re more comfortable than less comfortable than a year ago,” he said.

In 2009, the Government Pension Fund Global reduced its holdings of peripheral European bonds, but has since regained interest in Greek, Spanish, Portuguese, and Italian government debt. At the end of September, according to Bloomberg, Spanish debt was the fund’s seventh-biggest bond holding.

While Europe may be on the road to recovery, Ireland’s decision last month to seek European emergency funding added to worries that Spain and Portugal may have difficulties financing their budget deficits. The International Monetary Fund head Dominique Strauss-Kahn said earlier this week during a speech in Geneva that he believes “the situation in Europe remains troubling and the future is more uncertain than ever.” He criticized the European Union’s method for handling countries facing unsustainable borrowing costs.

In related news, a recent report by an independent council of Norway’s sovereign wealth fund has shown that the fund should take better advantage of its size. The report, compiled by the Strategy Council which is charged by the Norwegian Ministry of Finance to periodically review the fund’s investment strategy, asserted that the fund should use its massive size and long investment horizon to boost returns. “The distinguishing characteristics of the Fund include its large size, its long time horizon, the fact that it does not have specific liabilities (outside the return assumption specified by the spending rule), and its ownership and governance structure. Our proposed future changes focus on taking advantage of the long horizon,” the report stated. Strategies suggested: diversifying its equity portfolio to harness its value and liquidity risk premiums, selling insurance, and boosting its contrarian investing based on valuation ratios.