Bond Bulls Fashionable Again. BlackRock Isn’t Buying It

Notwithstanding the recent rally that found 10-year US yields below 3.5% on Tuesday following another downside inflation surprise in the US, 2022 was a singularly bad year for bonds.

This was the year during which the four-decade bond bull market finally died. Government bonds around the world have virtually never fared worse.

As such, investors will be forgiven for suspecting that, at the least, 2023 will be kinder. An encore of 2022 in the fixed income universe would constitute two wholly anomalous years in a row, which would in turn suggest the world has well and truly changed, consistent with my “Great Immoderation” thesis.

The December vintage of BofA’s closely watched Global Fund Manager survey showed participants were Overweight bonds for the first time since April of 2009 (figure below).

The 29-point MoM increase in participants’ allocation to bonds precipitated a pair of notable relative allocation shifts. Panelists in BofA’s survey are now Underweight commodities versus bonds, a rarity, and a marked change from the pandemic-era default setting, which found fund managers the most Overweight raw materials versus bonds in the survey’s history.

At the same time, panelists’ relative positioning in stocks versus bonds was the lowest since the famous March 2009 equity trough (figure on the left, below).

This comes as market participants continue to speculate on a downshift and eventual pause in hiking cycles from major central banks, which are generally expected to turn dovish next year in the face of a global recession. The net share of fund managers who think inflation will be lower over the next 12 months hit a record in this month’s poll.

“27% of FMS investors expect government bonds to be the best performing asset of 2023,” the bank’s Michael Hartnett noted. The figure on the right (above) shows bonds narrowly besting stocks and corporate credit. Not surprisingly given recent events, fund managers appeared cautious on crypto headed into the new year.

BofA has a bullish bias on long-end US bonds for the first half of 2023 amid elevated odds of a hard landing and the “underpriced” risk of credit events.

Meanwhile, BlackRock isn’t buying it — figuratively or literally. “We are Underweight nominal long-term government bonds in each scenario,” the firm said, in a 2023 outlook which described a “new regime.”

“The Great Moderation, the four-decade period of largely stable activity and inflation, is behind us,” Philipp Hildebrand and a host of colleagues wrote. “The new regime of greater economic and market volatility is playing out — and not going away, in our view,” they went on to say, in the course of suggesting that although central banks will engineer recessions, downturns won’t ultimately succeed in bringing inflation sustainably back to 2%.

They described the Underweight in nominal long-term government bonds as their “strongest conviction in any scenario.”


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