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Investors build up cash piles, bond market crash fears grow: BAML poll
[LONDON] Global investors have raised cash holdings back to post-Brexit highs and cut bond allocations to 10-month lows, nervous that bond prices are at risk of a destabilising selloff, a Bank of America Merrill Lynch survey showed on Tuesday.
The monthly survey of 213 fund managers with some US$563 billion under management showed cash levels jumping to 5.8 per cent from last month's 5.5 per cent, back at the highs hit in July following Britain's shock vote to leave the European Union.
The shift into cash came at the expense of traditional safe haven bonds, with bond holdings cut to a net 50 per cent underweight from a net 45 per cent underweight last month.
The bond allocation relative to cash is now at its lowest level since July 2006.
"Investors prefer holding (liquid) cash to low-yielding bonds on the margin," BAML said, adding that 76 per cent of respondents thought bond prices were too "frothy".
A crash in the bond market or rising credit spreads was chosen as the second-biggest tail risk by 18 per cent of respondents, and a net 31 per cent of investors expect yield curves to steepen - the highest per centage since June 2014, the bank noted.
The poll was carried out between Oct 7-13, just after UK gilts racked up their biggest weekly losses in more than a year after an extended fall in the pound triggered fears that a surge in inflation would undermine fixed income investments.
US and European government bond yields also hit four-month highs in mid-October, with US Federal Reserve chair Janet Yellen warning that the Fed might have to run a "high-pressure economy" to reverse the damage from the 2008-2009 crisis.
BAML noted that global inflation expectations were now at a 16-month high of a net 70 per cent, up from a net 61 per cent last month. Meanwhile, fears of stagflation, or low growth coupled with high inflation, were at the highest since April 2013.
BAML said it was therefore no surprise that asset allocators now have the largest emerging market equity positions in three-and-a-half years, and are no longer underweight commodities, as both are viewed as inflation hedges.
The emerging market equity allocation rose to a net 31 per cent overweight from a net 24 per cent last month, whilst the commodities reading moved to neutral. This is the first time investors have not underweighted commodities since December 2012.
The relative positioning of emerging markets versus developed markets jumped to the highest level since February 2013, with a net 33 per centage point overweight.
Investors remained preoccupied with the broader ramifications of Brexit, with 20 per cent of respondents citing EU disintegration as the number one tail risk.
A Donald Trump victory in the US presidential election was the second-biggest risk, picked by 17 per cent.
The equity allocation rose to a seven-month high at a net 11 per cent overweight, but UK equities remained out of favour, falling to a net 27 per cent underweight from a net 24 per cent last month.