Norway and Peripheral Bond Markets

Norway's government pension funds is the second largest sovereign wealth funds in the world with around $450 bln under management. Abu Dhabi is thought to have the largest sovereign wealth fund. The finance minister indicated that it has bought peripheral European bonds (Spain, Greece, Italy and Portugal. Ireland was note cited). Although many observers are regarding this as new news, it is not. On August 13, one of the fund managers had revealed the Greek bond purchases.

The comment from the Norwegian fund managers did not reveal the amount of peripheral bonds purchased or the duration. However, consider what has happened in the past month--Greek 10-year yields are up 141 bp, Portugal is up 75 bp, while Spain and Italy are largely flat.

Sometimes the value of hearing about what a large player does sends a signal and encourages some others to do the same or similar. This does not look like one of those times. The price action, not only in the bond market, where the European central banks have been participants, but also in the credit default swap market, shows the investors collectively are not as sanguine as Norway's pension fund.

That said, the fund's claim that Greece will not default on its debt, amy be still be a reasonable guess. It does not preclude a "voluntary" restructuring at some juncture. Getting a, say for the sake of the argument, a 15 year Greek bond in exchange for a 5 year bond, may cause a real hardship for some investors. However, for a sovereign wealth, with an investment horizon measured in generations, it may not be some problematic.