Cash weightings drop to 3-year low as allocators switch to bonds

Bank of America fixed income bonds inflation RBA interest rates

15 May 2024
| By Laura Dew |
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The latest monthly Bank of America global fund manager survey has found investors are making modest increases to their bond allocations in May.

According to the latest Bank of America Global Fund Manager Survey, which questioned 245 panellists with US$642 billion in assets under management between 3 and 9 May, respondents indicated they were starting to shift their cash allocations to achieve this. 

Bond allocations rose from a net 14 per cent underweight to a net 6 per cent underweight. 

In April, bonds saw their largest allocation drop in 20 years to stand at a 14 per cent underweight, some 1.2 standard deviations above the long-term average.

This month, however, the respondents retained this “big underweight” position but did make a modest increase in their allocations. Bond allocations rose by 7 percentage points to a net 6 per cent underweight which is 1.5 standard deviations above the long-term average. 

On the other hand, cash weightings now sit at 4 per cent, the lowest since June 2021. Cash allocations now sit at the Bank of America’s contrarian sell level for equities. Cash levels had peaked in September 2022 when they hit 6.1 per cent, its highest since after the 9/11 disaster in 2001.

Last month, Money Management wrote how allocators believe it is time for investors to switch out of cash and into bonds in advance of rate cuts by central banks. 

“Investors looking for capital growth who don’t need capital guarantees should consider introducing bonds into, or back into, their investment portfolio and doing so before central banks begin to cut rates. We have high conviction that bonds will provide better risk-adjusted return outcomes for investors who are able to take on the increased risks offered by bonds,” Perpetual said.

When it comes to rate cuts by the US Federal Reserve, 82 per cent of respondents to the survey expect to see a rate cut in the second half of the year and 78 per cent expect to see multiple cuts over the next 12 months. Almost half of respondents (47 per cent) are expecting lower bond yields in the future.

The percentage of respondents who expect short-term rates to be lower in 12 months was 83 per cent, up from 81 per cent in April, driven by bounce in expectations for lower inflation. Some 69 per cent expect lower inflation, up from 63 per cent. 

The threat of higher inflation is the number one tail risk identified by respondents at 41 per cent followed by geopolitics and an economic hard landing. Geopolitics remains unchanged in second place, but the percentage has fallen from 24 per cent in April to 18 per cent in May. 

The Bank of America’s overall fund manager sentiment, which is based on cash levels, equity allocations and economic growth expectations, rose from 5.8 to 6.0.  

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