If you ask fund managers who together steward some $600 billion in AUM, the biggest tail risk is now a “systemic credit event.”

That’s according to the March vintage of BofA’s closely-watched Global Fund Manager survey, and I suspect it was an easy call. After all, the survey period was March 10 through March 16, a period during which there were two near-miss systemic credit events (SVB and Credit Suisse).

I call them “near-miss” events because SVB wasn’t systemic in and of itself, and Credit Suisse didn’t technically fail, but those who’ve spent the latter half of the Fed’s tightening cycle suggesting a credit event was just a matter of time are now mostly vindicated. I’d argue “stuff” actually started to break in October, when a multi-sigma selloff in gilts nearly collapsed the UK LDI complex.

The idea of preemptively identifying tail risks always feels like an oxymoron, particularly when you’re crowd-sourcing it. If more than a few people can identify the next tail risk ahead of time, then that risk shouldn’t materialize, almost by definition. But I suppose there’s no use having a semantic debate.

Nearly a third identified a systemic credit event as the biggest tail risk in this month’s BofA poll, while persistently elevated inflation lost the top spot.

Fund managers overwhelmingly see US shadow banking as the most likely source of a credit event (How about just regular old US banking? That seems like a good candidate too!) US corporate debt was the second-most likely source, and Chinese real estate fell all the way to the number four spot.

On the heels of what, depending on your measurement window, counted as one of the most dramatic steepening episodes in decades, a net 52% of FMS participants expect a steeper yield curve, the most since June of 2021. More importantly, nearly 60% see lower short rates. That was up 10pp from February, and the most since March of 2020 (so, the largest share since the Fed was engaged in a panicked effort to offset the impact of the original COVID panic).

Recall that expectations of a lower short rate (i.e., Fed cut speculation) are seen as a precondition for a trough in equities, or at least if you’re parsing the BofA poll for unofficial guideposts.

At the same time, 84% think inflation will be lower a year from now. Perceptions around the 12-month outlook for global CPI softened steadily, and recently parked themselves near GFC levels.

Note that “inflation stays high” commanded a far smaller share of the tail risk vote in March compared to February, perhaps due to the expected impact of tighter credit conditions from the banking turmoil, or maybe just because if you had to choose which was more concerning this month, bank failures or inflation, most went with bank failures.

For what it’s worth, March was the first time systemic credit event has topped the tail risk list.

“The dominant concerns of investors since 2011 have been Eurozone debt & potential breakdown; Chinese growth; populism, quantitative tightening & trade wars, the pandemic; now inflation/bond tantrum and central bank rate hikes,” BofA’s Michael Hartnett said Tuesday.

As usual, there was some evidence of cognitive dissonance. Expectations for peak Fed funds exhibited a hawkish shift — a third of fund managers now see 75bps of additional hikes. My sense is that the fast-moving character of the US banking mini-crisis means those expectations are already dated. Note that the last day for responses was the day the Fed released data on discount window usage for last week, which presumably means many respondents didn’t factor in what those figures suggested about liquidity demand.

The “bottom line” from this month’s poll, according to Hartnett, was that investors’ perception of risks worsened in March for obvious reasons, and sentiment is now “close to levels of pessimism seen at the lows of the past 20 years.”

And yet, “positioning [and] policy panic” suggest 3,800 “holds” as a “floor” for the S&P, BofA said. Were stocks to run above 4,100, Hartnett suggested fading the rally — “systemic credit events” being bad things, and all.