Bond popularity is at financial crisis levels among professional investors as they brace for slowing growth ahead and interest rate cuts from central banks.
A net 43% of market pros see lower short-term rates over the next 12 months, compared to just a net 9% that saw higher long-term rates, according to the Bank of America Merrill Lynch Fund Manager Survey for August.
Taken together, that’s the most bullish outlook on fixed income since November 2008, as lower yields mean higher prices and capital appreciation for bondholders.
“Investors are the most bullish on rates since 2008 as trade war concerns send recession risk to an 8-year high,” Michael Hartnett, chief investment strategist, said in a statement.
“With global policy stimuli at a 2.5-year low, the onus is on the Fed, ECB and PBoC to restore animal spirits,” he added, referring to the U.S. Federal Reserve, the European Central Bank and the Peoples Bank of China.
Even amid $15.9 trillion worth of negative-yielding bonds globally, investors continue to flock to the space as the U.S.-China trade war threatens global growth. A net of just 22% of survey respondents said they are underweight bonds as allocation climbed 12 percent points over the month, the highest level since September 2011.
All of that popularity comes even though 32% of fund managers identified the bet on U.S. Treasurys as the most crowded trade in the market. That was followed by U.S. technology stocks (19%), growth stocks (15%) and investment-grade corporate bonds (12%).
Trade war worries
Bonds come into favor during times of economic stress as investors look for the comparative safety of government fixed income. A recession is likely over the next 12 months, according to 34% of respondents, the highest level since October 2011.
U.S. government bond yields are at multi-year lows, and the spread between the 2- and 10-year notes was just 6 basis points Tuesday morning; an inversion of the two is considered a classic recession signal.
The biggest area of concern is the trade war, which was cited by 51% of respondents. Monetary policy “impotence” was next at 15%, followed by a China slowdown and a bond market bubble, both with 9%. A record net 50% say they are concerned about business leverage, with 33% citing corporate bonds as the most likely bubble, followed by government bonds (30%), U.S. stocks (26%) and gold (8%).
Investors have been plowing money into fixed income funds this year. Global mutual funds and ETFs that focus on the space have taken in $281.9 billion this year, or 3% of total assets, according to BofAML data released last week. Global equities have fallen out of favor, with managers cutting their exposure by 22 percent points to a net 12% overweight. For the year-to-date, stock-based funds have seen $177.4 billion in outflows, or 1.2% of total assets.
At the ETF level, the iShares 7-10 Year Treasury fund has seen the biggest inflows year to date, with $5.9 billion in creations, according to FactSet. Fixed income ETFs overall have taken in $83.9 billion this year, compared to inflows of $44.6 billion for equities.