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1Q 2008 Quarterly report

The first quarter of 2008 was dominated by the financial turmoil that began with problems in the US mortgage market in early 2007 and subsequently developed into a wider crisis in parts of the financial system. Equity markets fell sharply during the quarter, while fixed income markets generated a positive return.

Global financial turmoil

The first quarter of 2008 was dominated by the financial turmoil that began withproblems in the US mortgage market in early 2007 and subsequently developed into a wider global confidence and liquidity crisis. Both fixed income and equity markets were affected. Although government bonds performed positively, fixed income markets in general were hit by a substantial widening of the credit spread betweencorporate and government bonds. Equity prices fell sharply during the quarter, especially in Japan and Europe.

The downturn in global equity markets in the first quarter of 2008 led to a negativereturn on the Government Pension Fund – Global and the investment portfolio inNorges Bank’s foreign exchange reserves of -5.6 and -4.9 per cent respectively measured in terms of an international currency basket. The Government Petroleum Insurance Fund, which is invested only in fixed income instruments, generated a return of 2.4 per cent.

Since the beginning of 2003, the European, US and Japanese equity markets have gained 75, 67 and 55 per cent respectively as measured by FTSE equity indices (see Chart 1-1). An index of equities in 24 emerging markets rose 386 per cent in the same period.

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