Global fund managers are shunning bonds, with the asset class seeing the largest drop in allocations in more than 20 years.
According to the latest Bank of America Global Fund Manager Survey, which questioned 260 panellists between 5 and 11 April, it found April saw the largest drop to bond allocations since July 2003.
Bond allocations fell by 20 percentage points between March and April and are now sitting at a 14 per cent underweight. The current allocation is 1.2 standard deviations above the long-term average.
The expectations that bond yields will be lower in 12 months time has fallen from 62 per cent in December 2023 to 38 per cent, the lowest proportion since October 2022.
Over three-quarters of respondents said they expect to see at least interest rate cuts from the Federal Reserve in 2024, with 27 per cent expecting to see three cuts. Only 8 per cent did not expect any rate cuts.
“BofA Global FMS expectations for higher global inflation have inflected sharply to the highest level since April 2022, driving expectations for higher short-term rates to the highest since November 2023.
“The majority of FMS investors still expect lower short-term rates (net 76 per cent) and lower inflation (net 45 per cent); only 5 per cent expect higher short-term rates while 18 per cent expect inflation to rise (up from 7 per cent two months ago).”
Bank of America said the reduction to bonds was the largest change to investor allocations during the month, followed by cash and consumer staple reductions. Cash allocations fell from 4.4 per cent of assets under management in March to 4.2 per cent in April, close to Bank of America’s contrarian sell level for equities of 4 per cent.
This is the biggest three-month drop in cash since December 2020.
“Bull sentiment is not quite at ‘close your eyes and sell’ levels but risk assets tactically much more vulnerable to bad news than good,” the monthly report said.
Overall fund manager sentiment, which is based on cash levels, equity allocations and economic growth expectations jumped from 4.6 to 5.8.
Looking at macroeconomic expectations, 36 per cent said they are expecting to see “no landing”, up from 23 per cent in March. Over half (54 per cent) are expecting a soft landing, down from 62 per cent, and just 7 per cent are expecting a hard landing.
More than three-quarters (78 per cent) believe a recession is unlikely to occur within the next 12 months, up from 65 per cent last month.
For the first time since December 2021, investors are expecting global growth to accelerate and a net 11 per cent are expecting a stronger economy over the next 12 months.
“Investors turned net bullish on the macro for the first time since December 2021 … net 11 per cent expect a stronger economy over the next 12 months (jumping from net 12 per cent expecting a weaker economy in March 2024).”
