Investors are bullish on rates, in case you somehow didn’t get the memo on that.
If there’s one takeaway from the August edition of BofA’s closely-watched global fund manager survey, that’s it. In fact, the title is: “My herd is my bond”.
“[A] net 43% of FMS investors expect lower short-term rates and only 9% expect higher long-term rates over the next 12-months”, the bank’s Michael Hartnett said Tuesday, of the latest poll results. “Taken together this is the most bullish FMS view on bonds since November 2008”, he added.
Although bonds retreated on Tuesday amid the risk-on sentiment catalyzed by news that the Trump administration is delaying tariffs on some key consumer goods until December 15, yields have obviously plunged amid a worsening outlook for global growth, falling inflation expectations and the assumption of aggressive easing from central banks.
30-year yields stateside are gunning for record lows.
Meanwhile, in the eurodollar options market, traders are hedging against a return to the zero lower bound and the likes of Pimco are suddenly sounding a lot like Albert Edwards.
Getting back to the August fund manager survey, Hartnett notes that “34% of FMS investors think a recession is likely in the next 12 months”. That compares to 64% who think a downturn is unlikely. August marked the highest recession probability since October 2011.
As you might imagine given recent events, “Long USTs” topped the “most crowded trade” list again. This is three months in a row, although interestingly given that the survey period was August 2 through August 8, there was less conviction this month than last.
On the heels of Donald Trump’s August 1 announcement (on Twitter, of course) that the US will be slapping tariffs on more Chinese goods from September 1, trade war concerns jumped 15ppt, meaning 51% of respondents said “trade war” is the top “tail risk”.
If you go ahead and count “China slowdown” as a trade-related risk (which it is), trade concerns have topped the list for 17 of the past 18 surveys.
To the extent that’s all on Trump, “Tariff Man” deserves a round of applause – he’s been lingering in the dark reaches of investors’ minds where the black swans and gray rhinos mingle for a year and a half now.
Among other highlights, BofA’s Hartnett notes that “investors slashed exposure to cyclicals to buy US Treasuries and US growth stocks”, a record 50% of FMS participants now see corporate balance sheets as overleveraged (not a great sign given the higher perception that a recession is likely) and the contrarians among you would be long inflation assets versus deflation assets.
“[The] onus is on the Fed, ECB and PBoC to restore animal spirits”, Hartnett says.
Good luck, we’re all counting on you.