Fund managers have virtually never been this bullish on long-term bonds.
Or at least not according to BofA’s closely watched Global Fund Manager survey.
With the odds of a US recession now at an “elevated” 100% if you’re inclined to go by Bloomberg Economics’ proprietary model projection, and signs of systemic stress mounting across markets, the percentage of survey respondents who see lower long-term rates in the next 12 months reached 38% in October.
As the figure (above) shows, that’s nearly in line with the percentage who see higher long-term rates.
The implication: The net share of more than 300 panelists who together account for some $1 trillion in AUM who see higher long-term rates over the next year now stands at just 3%, the lowest since 2008, a year during which a few things went awry.
As alluded to above, that’s consistent with a darkening outlook for… well, for pretty much everything.
A net 91% of panelists in BofA’s survey said global profits won’t likely rise 10% over the next 12 months. That was on par with levels seen during the financial crisis, and very nearly a record low. Notably, that series (anecdotal though it is) maps pretty well with forward earnings projections, which many top-down strategists still insist are destined to fall sharply.
At the same time, the net percentage expecting a stronger economy over 12 months loitered near “max bearishness” for the eighth consecutive survey (figure below).
Equities, BofA’s Michael Hartnett noted, have finally noticed. “While the stock market was immune to the bleak sentiment untill last month, it has started to better reflect investors’ pessimism,” he remarked.
Meanwhile, JPMorgan trimmed their equity Overweight and their bond Underweight, even as the bank stayed Overweight stocks and Underweight bonds overall. “We trim risk in our model portfolio this month given increasing risks around central banks making a hawkish policy error and geopolitics,” analysts led by Marko Kolanovic wrote.
“[T]he increasingly hawkish rhetoric from central banks and escalation of the war in Ukraine are likely to delay the economic and market recovery,” JPMorgan explained. Still, the bank is “pro-risk overall.” “Extremely weak investor positioning and sentiment should limit further downside and an expected growth recovery in Asia should support the cycle,” Kolanovic said.
So far, anyone who bought the dip on TLT is underwater. Terminal rate has been revised higher and higher.
The higher terminal rate expectations go, the more likely it is that the long-end will rally. A 5%+ terminal rate is virtually guaranteed to bring about a recession. The rationale behind the bullish long-term bond call is that the Fed will hike so much that the economy buckles.
What happens if there’s a pivot?
Watch 3 month bill versus 10 years. That’s what powell watches. That is still positive by about 20 bps even tho 2-10s and 5-30s have been inverted for awhile. Another 75 or even 50 at November’s meeting inverts that most likely. By Powells definition that is restrictive. Throw in a spread blowout of mortgages and high yield, stir gently and wait for other credit events.
But of course if you are mo, Larry or curly you advocate far more tightening!!!
This is an ominous story on bloomberg re ust bonds and the financial markets:
https://www.bloomberg.com/news/articles/2022-10-17/momentum-builds-for-creation-of-a-treasury-bond-buyback-program
Yeah, I’d recommend that article, actually. It’s a good summary of that debate, which is obviously becoming more germane by the week.
Earnings coming in solid, markets up smartly two days in a row — this does not feel like an economy about to fall out of bed.