BofA Says Risk of Disorderly Bond Move Trims Excess Bullishness

(Bloomberg) -- Exuberance around risk assets is fading as investors worry about a chaotic rise in bond yields and the results of US midterm elections, according to a survey by Bank of America Corp.

A net 49% of fund managers are overweight global equities compared with 56% last month, the poll showed. Respondents flagged that they now view a disorderly rise in bond yields as the biggest tail risk to the market.

Cash holdings rose to 3.9% of portfolios, although they remained at levels that flash a "sell signal" for risk assets, BofA strategist Michael Hartnett wrote in a note.

Global stocks have come under pressure as bond yields breached key levels amid fears of an inflation shock. The 10-year US Treasury yield rose to the highest since 2007 on Tuesday with oil prices firmly above $100 a barrel. The MSCI All-Country World Index declined for a second session.

Swaps traders are now pricing in about 94% odds of a Federal Reserve rate hike on Wednesday, the first increase in three years. Still, the BofA survey showed investors believe the central bank is behind the curve. A net 25% of participants said monetary policy is too stimulative, the highest since 2022.

While some investors have warned about further pressure on stocks from US 10-year yields above 5%, market forecasters are broadly confident that equities can absorb higher rates because of the resilient economy.

BofA's Hartnett said the share of respondents expecting a double-digit increase in corporate earnings over the next year was the highest since August 2021. Investors are bullish about the macro outlook, with the "sole worry" being that companies are over-investing capital, he said.

For now, a net 48% of fund managers are underweight bonds, the most since May 2022. Nearly half the participants said they expect no impact on yields from the Treasury's buyback program.

On the midterm elections, about 44% of investors said the most likely outcome was a split between a Democratic House of Representatives and a Republican Senate. In the event of a Democratic sweep, nearly half of respondents expect bond yields to rise and stocks to decline.

The survey was conducted from Sept. 4 to Sept. 10 and canvassed 170 participants with $470 billion in assets.