Latvijas Banka manages its gold and its financial investments in accordance with the investment management guidelines set by the Council of Latvijas Banka, observing the principles of prudent management. Investments are managed in a such way as to ensure the long-term effects of:

  • capital preservation;
  • liquidity;
  • income generation.

Investment management is based on the principles of sustainability and the Agreement on Net Financial Assets of the Eurosystem central banks.

Investment composition

Diversification is one of the primary strategies used in investment management. Latvijas Banka mostly invests its financial assets in:

  • debt securities issued by the governments of the US and European countries, their agencies or international institutions;
  • asset-backed securities;
  • securities in the emerging markets government securities index;
  • securities in the global investment grade fixed income securities index;
  • equities issued by companies in developed and emerging markets equity indexes;
  • high-quality debt securities issued by corporate

The total value of Latvijas Banka investment portfolios at the end of 2023 was 5.73 billion euro, which was 0.28 billion euro more than at the end of 2022.

Chart 1. Investment composition, 31 December 2023


Investment management framwork

Latvijas Banka manages its investments in-house and also uses external managers. Investments are made in three main asset classes of fixed income securities, equities and gold.

Investment in fixed income securities

The bulk of investment in fixed income securities is managed in-house. The benchmark of the 1–10 year fixed income securities portfolio managed in-house consists of the weighted index of 1–3 year US and Canadian government securities, and 1–10 year euro area and UK government securities. The benchmark is composed of assets denominated in:

  • US dollars – 55%;
  • euro – 21%;
  • British pounds sterling –14%;
  • Canadian dollars – 10%.

Investments in investment-grade fixed-income government securities market countries are made through exchange-traded funds (ETFs).

Latvijas Banka also uses the services of seven external managers to manage investments in fixed- income securities. They manage a part of Latvijas Banka's financial assets in accordance with the guidelines set by the Council of Latvijas Banka.

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

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

Investment in equities

Investment in equities mostly comprises the portfolio of equities from advanced markets, which is managed by an external manager. This portfolio is managed under the sustainability strategy of Latvijas Banka and its targets are:

Investment in emerging market equities is managed against the corresponding equity index and is made through ETFs.

Investment in gold

Latvijas Banka's gold is stored at the Bank of England.

Under the Statute of the ESCB and of the ECB, Latvijas Banka has transferred a small share of its financial assets to the ECB to be managed as part of the ECB’s foreign reserves. The ECB's reserves are managed by the national central banks of the Eurosystem, where each bank is allocated a share of financial assets to manage in accordance with their capital key at the ECB.1 Latvijas Banka manages its

share in Japanese yen together with Oesterreichische Nationalbank. Under the Statute of the ESCB and of the ECB, 1.1 tonnes of Latvijas Banka's gold have been included in the ECB reserves.

Risk management

Risk management is an integral part of investment management. Risk management means developing risk scenarios, assessing the potential returns on financial assets and the risks to them, and modelling the optimal asset allocation. Whether the investment portfolio complies with the guidelines and the risks are distributed in accordance with investment decisions is monitored and controlled on a daily basis.

Interest rate risk is one of the most significant risk factors affecting Latvijas Banka's investments. Particular attention is paid in managing investments to the yields of two, five and ten-year government bonds and their risk premiums.

2023 in review

Surging interest rates had a strongly negative effect on the short-term value of fixed income portfolios in 2022; nevertheless, higher interest rates and lower equity market values created a positive outlook for better investment performance in the long term.

Although interest rates were at a high level in 2023, they were also very volatile and the level of volatility in them was historically high. This significantly affected the volatility of the whole investment portfolio throughout the year.

Chart 2. US Bond Market Option Volatility Estimate (MOVE) index over 10 years
(index points)


Sources: Bloomberg Finance LP, Latvijas Banka.

The US Federal Reserve System continued to raise the federal funds rate, with the total uninterrupted increase in the rate since 2022 reaching 525 basis points.

Chart 3. The US federal funds target interest rate hiking cycles


Other central banks also continued to raise their policy rates over the first three quarters of 2023, with the overall increases during the current tightening cycle that started in 2022 ranging from 450 basis points to 515.

Chart 4. Development of central bank policy rates (yields; %)


The dynamics of inflation and the decisions of central bank monetary policy, together with the expectations of financial markets, were the main reason why interest rates were so volatile, and they combined to push interest rates upwards from the middle of the second quarter to the end of the third quarter. The rhetoric from central banks changed in the fourth quarter, and this contributed to a fall in interest rates, which had a positive effect on both the fixed income and equity portfolios. Chart 40 shows that:

  • volatility was lowest for the euro area securities and highest for the UK securities;
  • the rates in all the markets and market segments covered by the Chart had fallen markedly by the end of the year from their peaks observed during the year;
  • the rates were lower at the end of the year than at the beginning of it, except the yield on the 10-year US Treasury notes, which ended the year 1 basis point higher.

Chart 5. Range of government securities yields in 2023


Although the restrictive monetary policy of central banks kept short-term interest rates at high levels, the market expectations of weaker economic growth and future rate cuts by central banks maintained the inverted yield curves at historically low levels, with longer-term yields remaining lower than short- term yields throughout the year.

Chart 6. US Treasuries yield curve dynamics (%)


Periods of a negative US Treasury yield curve (duration in weeks)


Sources: Federal Reserve Bank of St. Louis, Latvijas Banka.

Following two years of negative returns, with particularly negative returns in 2022, it looked like the overall performance of global fixed income securities would also be negative in 2023, with the annual return bottoming out at –3.8% on 19 October. However, the significant reduction in yields in the fourth quarter, when the global fixed income index showed the fastest two-month rally ever seen, resulted in returns climbing by 8.2% from the lowest point of the year to the end of the year, and thus the total result for the year was 5.7%.

Chart 7. Bloomberg Global Aggregate index annual returns (%)


The year 2023 was much more successful than 2022, when investors had no real opportunities to earn profits because of the negative performance of both fixed income securities and equities. Fixed income securities delivered moderate returns in 2023, while the returns on equities were at historical highs.

Chart 8. Annual real returns of the S&P 500 index and 10-year US Treasuries since 1928 (%)


Operational areas