The State Bond Fund to invest in the corporate bond market

The Government proposes to establish a bond fund of up to NOK 50 billion. The fund’s objective would be to contribute to improved capital market liquidity by investing in a diversified manner at fair market prices in fixed income instruments issued by companies domiciled in Norway. The fund would be built up the next year or so, for then to be gradually reduced and wound up in due course. The operational management of the fund would be undertaken by the dedicated asset manager Folketrygdfondet, which would invest in the public fixed income market alongside other investors.

The Government proposes to establish a bond fund of up to NOK 50 billion. The fund’s objective would be to contribute to improved capital market liquidity by investing in a diversified manner at fair market prices in fixed income instruments issued by companies domiciled in Norway. The fund would be built up the next year or so, for then to be gradually reduced and wound up in due course. The operational management of the fund would be undertaken by the dedicated asset manager Folketrygdfondet, which would invest in the public fixed income market alongside other investors.

Governance
The fund would be established by a separate act of the Storting (Parliament), delegating to the Ministry of Finance to establish regulations on the investment mandate (including a benchmark and risk limits), and where the operational management would be undertaken by Folketrygdfondet. Folketrygdfondet is a professional asset management organization owned by the state where the board reports to the Ministry of Finance.

The investments of the bond fund would be similar to Folketrygdfondet’s current management of the bond portfolio of the Government Pension Fund – Norway. The bond fund would have a similar governance framework, where the Ministry acts as the owner and where Folketrygdfondet makes independent investment decisions according to a clear mandate and with appropriate reporting requirements. Folketrygdfondet’s management of such a bond fund would be a distinct investment mandate separate from the management of the Pension Fund – Norway.

Investment activity
The investment mandate would require Folketrygdfondet to invest in public fixed income instruments issued by banks and other companies domiciled in Norway. The fund must be large enough to achieve its objective, but the size of the investments not so large that they completely dominate the corporate bond market. The size of the actual investments must reflect market circumstances, but one envisages gradual purchases of up to NOK 30-50 billion the coming year.

Investments would take place both in the primary and secondary market. Considering the structure of the market and operational risk considerations, investments would be dominated by bonds with low to moderate credit risk (“investment grade”).

Bonds are to be bought at fair market prices. This will be facilitated by ensuring that Folketrygdfondet invests in the public fixed income market alongside other investors.

Folketrygdfondet as the manager is expected to invest based on financial, market oriented considerations. Folketrygdfondet has complete operational independence in carrying out its investment mandate. Current expectations are that the investments will provide good risk-adjusted returns.

The bond fund is to be a temporary measure. After a build-up phase the next year or so, it is to be gradually reduced and wound up in 5-10 years. The fixed maturity nature of fixed income instruments facilitates such an exit strategy.

Depending on the legislative process in the Storting (Parliament), the investment of the bond fund could start within a few weeks.