The number of investors saying bonds are overvalued rose to a record high of a net 85 percent in October, Bank of America Merrill Lynch's monthly fund manager poll showed on Tuesday. The survey, which polled 207 asset managers with a combined $585 billion under management from October 6 to 12, showed investors expect bond yields to rise and are most fearful of a misstep in central bank policy as a historic monetary tightening cycle gathers pace.
Investors are positioning for higher yields with asset allocators piling into bank stocks and Japanese assets, and pulling out of utilities, emerging markets, healthcare and bonds, the survey showed. About 82 percent of respondents expected bond yields to rise in the next 12 months.
With prospects for higher yields riding on central bank tightening, a "policy mistake" by the Fed or the ECB was investors' biggest fear (cited by 24 percent), nudging ahead of North Korea, with a crash in global bond markets a close third. The net overweight to global equities rose to +45 percent as consensus cemented around stocks being the most lucrative asset class in an environment of synchronised global growth.
BAML's risk and liquidity indicator measuring the percentage of investors taking higher than normal risk, longer than normal investment horizons and being overweight cash, rose to its highest since April 2015. Meanwhile cash balances fell to 4.7 percent, the lowest level in 2 1/2 years, as investors grew more bullish. "A faster drop in cash leading into 2018 would indicate a sell signal from investors," said Michael Hartnett, chief investment strategist at BAML.
Expectations for above-trend growth and below-trend inflation (the scenario BAML strategists have dubbed 'Goldilocks', and which underpins enthusiasm about equities) rose to 48 percent, a record high. "For the first time in six years, Goldilocks trumps secular stagnation," strategists wrote. Expectations for below-trend growth and below-trend inflation fell 11 percentage points from last month to 34 percent.
US consumer prices rose less than expected in September, confirming a trend of lower inflation readings. Investors' focus had turned back to the "reflation trade" late last month after President Trump delivered further details on tax reform plans. But asset allocators seemed nonplussed about the prospect of fiscal reform: two-thirds thought the US would see tax cuts in 2018, but that it would not have a big impact on risk assets.
For the fifth time this year the tech-heavy Nasdaq Composite was considered the "most crowded" trade, followed by long US/EU corporate bonds and long Eurozone equities. The popularity of Eurozone equities showed no signs of waning, with allocation rising to a five-month high in October, at a net 58 percent overweight from 54 percent last month. Views on the euro, which has surged 12 percent this year against the dollar, moderated slightly with just 4 percent saying the euro is overvalued, from 16 percent in September.
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