Bonds are back as managers hold biggest overweight since GFC

Global fund managers have made their biggest shift into bonds since the global financial crisis (GFC) in March 2009 as interest rates stay high.

The Bank of America (BoA) Global Fund Manager Survey, which questioned 265 panellists with $632 billion in assets under management, found the only higher overweights to bonds had been in December 2008 and March 2009 when investors sought defensives during the GFC.

During October, allocations to bonds spiked by 18 percentage points to a net 19 per cent overweight, and the current allocation is 2.8 standard deviations above the long-term average. BoA said investors have been overweight for all but two months in 2023.

In order to achieve this shift into bonds, managers rotated out of materials, industrials, banks and UK equities.

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“The big change in the November fund manager survey was not the macro outlook but the conviction in lower inflation, rates and yields, as evidenced by the third largest overweight in bonds in the last two decades.”

Over half of respondents expected bonds to perform best in 2024 compared to just 29 per cent who expected equities would perform best. Specifically, they favoured high grade bonds with a net 37 per cent saying high grade bonds will outperform high yield ones. 

Interest rates have remained high this year, with the Reserve Bank of Australia raising rates to 4.35 per cent in November, while rates are 5.5 per cent in the US and 5.25 per cent in the UK. 

Worries about central banks and inflation are diminishing, down from 45 per cent in July, when it was considered the biggest tail risk, to 25 per cent this month, which meant it dropped down to second place. Instead, respondents are worried about geopolitics, which jumped from 14 per cent to 31 per cent, likely prompted by the ongoing war in Gaza.

As well as bonds, managers were overweight in healthcare and technology equities, Japanese equities and cash. 

Cash weightings “fell dramatically” from 5.3 per cent to 4.7 per cent, which BoA said is the largest monthly drop this year. 

Overall fund manager sentiment, which is based on cash positions, equity allocations and economic growth expectations, dropped only slightly from 1.7 per cent to 1.6 per cent. BoA said this is classed as bearish but no longer “extreme bearish”.