Latvijas Banka manages gold and financial investments in accordance with investment management guidelines and in line with prudent management principles. Investments are managed to ensure the following in the medium term:

  • capital preservation,
  • liquidity,
  • income generation.

In adition, the management of investments takes into account the principles of sustainability and the Agreement on Net Financial Assets of the Eurosystem central banks.

Investment structure

Diversification is one of the primary strategies used in investment management. Latvijas Banka mostly invests financial assets in debt securities issued by the governments of the US and European countries, their agencies and international organisations, asset-backed debt securities, debt securities issued by the governments of developing countries, equities included in the equity index of developed and developing countries, as well as in high-quality debt securities issued by corporates.

At the end of 2022, the total volume of investment portfolios of Latvijas Banka was 5.5 billion euro.

Taking into account the rapid increase in the likelihood of a recession, in 2022 Latvijas Banka sold approximately a quarter of its investments in equities, realising the accumulated profit.

Chart 1. Investment structure



Investment management organisation

Latvijas Banka uses both internal and external managers in its investment management, and investments comprise three main asset classes: fixed income securities, equities and gold.

The largest share of investments in fixed income securities is managed internally. The benchmark of the financial assets managed internally consists of the weighted index of 1–3 year government securities of the US and Canada and that of 1–10 year government securities of euro area countries and the UK. The benchmark is composed of assets denominated in:

  • US dollar – 55%;
  • euro – 21%;
  • British pound sterling – 14%;
  • Canadian dollar – 10%.

Investments in the investment-grade fixed-income government securities of developing countries are made via exchange-traded fund (ETF).

Latvijas Banka also uses the services of seven external managers to manage a part of investments in fixed income securities. External managers manage assets in accordance with the guidelines issued by the Council of Latvijas Banka.

  • Six managers manage portfolios of US mortgage-backed fixed income securities.
  • One manager manages an investment grade global fixed income securities portfolio.

For all investments in fixed income securities, except for the investment grade global fixed income securities portfolio, the currency risk is hedged against the euro.

  • Developed markets equity portfolio tracks the developed market equity index and is managed by an external manager. Developed markets equity portfolio makes up the largest share of equity investments. In 2022, the portfolio was restructured in accordance with the sustainability strategy of Latvijas Banka, and its target indicators include: to enhance carbon neutrality by 2050 at the latest, to ensure the compliance with the provisions set out in the Paris Agreement and to act towards the preservation of biodiversity and enhancement of pollution mitigation strategies and to improve environmental, social and governance factors (ESGs).
  • Investments in emerging market equities are managed against the respective equity index and are made using the ETF.
  • Latvijas Banka’s gold is stored at the Bank of England.

A description of the application of sustainability criteria and changes in investment portfolios is set out in the report “Climate-related disclosures of Latvijas Banka’s non-monetary policy portfolios”.

Similar to other central banks of the euro area, Latvijas Banka has transferred a small share of its financial assets to the ECB for management as part of its foreign reserves. The ECB reserves are managed by the central banks of the Eurosystem, where each national central bank receives a share of financial assets (according to their capital key at the ECB) that they manage according to the ECB’s guidelines.

Together with Oesterreichische Nationalbank, Latvijas Banka manages the foreign reserve assets in Japanese yen transferred to the ECB. 1.1 tonnes of Latvijas Banka’s gold are included in the ECB reserves.

Risk management

Risk management and control are an integral part of investment management. Risk management entails risk scenario calculations, assessments of potential loss in the worst-case scenarios and modelling of an optimal asset allocation. The investment portfolio’s compliance with the guidelines and the risk allocation in accordance with investment decisions is monitored and controlled on a daily basis.

The interest rate risk is one of the most significant risk factors affecting Latvijas Banka’s investments. In managing investments, the focus is on government 2, 5 and 10-year bond interest rates and risk premiums.

Developments in 2022

During 2022, interest rates in all markets increased significantly, in several segments eventually reaching the highest level observed during the year, and this had a very negative impact on the market value of fixed income investment portfolios.

The sharp rise in interest rates came as a surprise not only to investors but also to monetary policy decision makers. For example, the US Federal Reserve System’s decision makers in December 2021 expected that by the end of 2022 interest rates would rise only by 90 basis points. In reality, the Federal Reserve’s base interest rate rose by 425 basis points.

Chart 2. The US Federal Reserve System rate hiking cycles



Chart 3. Range of government securities yield in 2022
(yield; %)



Given the low level of interest rates at the beginning of the year and the rapid rise in interest rates in 2022, the safest investment asset – government fixed income securities – showed the worst annual performance (measured by the yield on US 2-year and 10-year government fixed income securities) in the last 45 and 60 years.

Chart 4. Return on US 2-year and 10-year Treasuries



Additionally, Bloomberg Global Aggregate index showed the worst result since the index’s inception.

Chart 5. Bloomberg Global Aggregate index annual returns



The year 2022 was also unique, because it did not provide investors with real diversification opportunities. Historically, this was the first year when both equity prices (as measured by the US S&P 500 index) and fixed income securities (as measured by the US 10-year Treasury) fell by more than 10% in one year. The only asset class that showed positive returns in 2022 was natural resources.

Chart 6. Annual total return performance of the S&P 500 and US 10-year Treasury since 1928



At the beginning of 2022, fixed income yields were still at very low levels: approximately 16.5% of global investment grade fixed income securities had negative yields. In the first half of the year, rates began to increase rapidly, and at the end of 2022, the amount of such securities was very small.

Chart 7. Negative-yielding fixed income securities
(% of total securities)



Higher yield rates and lower equity market values create a positive outlook for better investment performance in the medium term.

Operational areas