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Turbulence ahead? Fund managers off bonds at highest rate in 20 years

Turbulence ahead? Fund managers off bonds at highest rate in 20 years

In recent weeks, the United States bond market has been grappling with uncertainty as the broader financial landscape remains on the edge ahead of the Federal Reserve’s interest rate decision.

This uncertainty is echoed in fund managers’ activities, who have been offloading bonds at a pace not seen in over two decades. 

Specifically, the Bank of America (NYSE: BAC) BofA Global Research fund manager survey released on April 17 indicated that bond allocations experienced their most substantial month-over-month drop since July 2003. 

The survey added that fund managers are now holding the most underweight position in bonds since November 2022.

Fund manager allocation for bonds. Source: BoFa.

In March, a net 40% of managers anticipated bond yields to decrease over the next 12 months.

However, this sentiment dropped slightly in April to a net 38%. This change reflected a broader adjustment in market expectations, with a notable decline from the net 62% holding a similar view in December of the previous year.

Implications of fund managers offloading bonds 

Historically, rapid sell-offs in the bond market have been interpreted as bearish signals, often indicating a lack of confidence in the market’s future performance.

The sell-off comes amid a broad shift in sentiment regarding the timing and extent of the Federal Reserve’s expected rate cuts. With stubborn inflation data, investors have become slightly less optimistic about rate cuts. Additionally, there are concerns that inflation could escalate if oil prices continue to spike amid rising tensions in the Middle East.

Elsewhere, the BofA survey indicated a notable increase in equity and commodity allocation. Fund managers have been reallocating their portfolios, favoring assets perceived to have higher growth potential while divesting from bonds, which traditionally offer stability and income. 

The move towards commodities comes when assets such as gold have recorded significant gains in recent days, hitting a new all-time high.

Worth noting is that 260 panelists managing $719 billion in assets participated in the BofA Global Research fund manager survey conducted from April 5 to April 11, 2024. 

Of these, 224 participants with $638 billion in assets responded to the questions, while 144 participants with $319 billion in assets responded to the survey. 

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