Background on Norway’s SWF Government Bond Index Shift to GDP Weights
For nearly 40 years, bond indices have been employed for benchmarking public investor portfolios. The most widely used methodology has been one based on market capitalization. Norway’s Government Pension Fund Global (GPFG) modified their government bond index from a market capitalization-weighted index to one based on gross domestic product (GDP). Norway’s sovereign fund investment in government bonds is based according to the economic size of the target nation, measured by its GDP. Other investment factors include the country’s strength and stability of public finances. Executives at Norges Bank felt that a market capitalization-weighted benchmark for government bonds means an increase in the sovereign fund’s exposure to countries with growing national debt. Market-weighted benchmarks are still being applied for corporate bonds.
The bias on market capitalization-weighted government bond indices is that the most-indebted country gets the biggest weight.
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