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The Government Pension Investment Fund made a record cut to the weighting of Treasuries in its portfolio last fiscal year as the world’s safest asset led a global debt selloff.

GPIF, as the world’s biggest pension fund is known, lowered U.S. government bonds and bills to 35% of its foreign debt holdings in the 12 months ended March, from 47% previously, according to an analysis by Bloomberg of the latest data. The weighting pivot comes largely from the Japanese fund increasing investments into European sovereign debt.

The re-balancing comes with the fund now over a year into a new investment plan that’s reduced dependence on Japanese government bonds and shifted focus toward higher returning equities and overseas debt. While GPIF offers little commentary on annual changes in its portfolios, even small adjustments reverberate through world markets given its total investments of about $1.7 trillion.

GPIF said in its annual report that it adjusted allocations to reduce deviations from benchmarks. Some strategists suggested the pension giant may have sought to trim Treasuries because of an extended period of underperformance. Others said this could have been incidental as it moved to reduce risk by aligning weightings with global indexes.

To be sure, GPIF’s Treasury holdings had shot up in the year earlier, particularly in shorter maturities, just as it was mulling the new investment plan. This offers yet another reason — that extra funds had only been parked temporarily in U.S. bills and notes as a substitute for cash before the fund settled on more permanent allocations.

Whatever the motives may have been, GPIF made a 7.1% return on overseas debt last fiscal year, versus 5.4% for FTSE Russell’s World Government Bond Index excluding Japan, which it measures performance against. That represents the strongest result in four years versus the benchmark.

FTSE Russell’s weighting for Treasuries was around 38% as of the end of June, including Japanese debt.

GPIF’s allocations for French, Italian, German and the U.K. bonds all increased by at least 1.7 percentage points in the 12 months through March. Purchases of these securities totaled ¥5.72 trillion ($52 billion) after adjusting for fluctuations in exchange rates and bond prices, Bloomberg’s analysis found.

While the weighting for U.S. bonds fell, GPIF still added about ¥1.1 trillion worth of Treasuries to its holdings last fiscal year, after adjusting for currency fluctuations and bond returns, according to Bloomberg’s analysis. That took its hoard to about ¥17.5 trillion.

Under its five-year investment plan that took effect in April 2020, GPIF aims to split its portfolio evenly between stocks and bonds, with these two asset classes then divided equally between domestic and foreign markets. Japanese government bonds previously had a 35% weighting in total investments.

The changes are paying off, with the return last fiscal year on bonds and stocks combined beating the fund’s composite benchmark for the first time in seven years.

It isn’t possible to fully assess how well GPIF timed its adjustments because the fund doesn’t disclose when during the 12-month period changes took place. But, there is a clue in the fund’s annual report released in July.

GPIF “substantially adjusted” allocations to bonds denominated in the dollar, euro and pound as an estimated tracking error was relatively high in the first half after the pandemic drove up market volatility, Eiji Ueda, the fund’s chief investment officer, wrote in the report.

A tracking error refers to the standard deviation of a fund’s excess return over a benchmark index.

There was enormous movement in bonds over fiscal 2020, with 10-year Treasury yields largely moving sideways over the first half before surging about 100 basis points to around 1.7% in the second half.

The fund’s smaller peers in Japan, which often follow its lead, will scrutinize the latest changes.

“GPIF has a large influence over the investment decisions of other pension funds in Japan,” said Ayako Sera, a market strategist at Sumitomo Mitsui Trust Bank Ltd. in Tokyo. “What it does has an impact in the market.”

Looking at the more recent moves, Sera sees the attractiveness of Treasuries dropping even further.

“Current yield levels don’t compensate investors enough to take foreign-exchange risks,” she said.

Treasury Department data show Japanese investors overall have sold a net $24 billion of U.S. government bonds since the start of the Asian nation’s current fiscal year on April 1. They offloaded $35 billion in the 12 months before that, the most in three years.

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