Bond Bubble Warning: BofA Survey Reveals Managers’ Pessimism

• According to a Bank of America report, apprehensive investors have been increasing their bond allocations and cash reserves in May.
• The Federal Reserve’s hawkish policy has caused Ryan Payne from Payne Capital Management to call the bond market a “dangerous place to be”.
• Although most respondents in BofA’s survey expect weaker growth, they are still hopeful for a soft landing.

Bond Allocations on the Rise

According to a recent report by Bank of America (BofA), apprehensive investors have been pumping their bond holdings in May, as well as cash reserves, fearful of a possible recession. Managers choose to allocate into bonds — is it dangerous? The May Global Fund Manager Survey revealed managers continue to increase their bond allocations to 14% from 10% the month before. Moreover, the spike constituted a significant growth after bond allocations were as low as 1% in March 2023.

Federal Reserve Policy Prompts Concern

Notably, Fed Chair Jerome Powell has been raising interest rates up to 5% in 10 consecutive revisions since Q2 2022, with the latest hike in Q1 2023. The Fed’s hawkish policy prompted Ryan Payne, the President of Payne Capital Management (PCM), to call the bond market a “dangerous place to be” at the moment. In an interview with Reuters, Payne commented on the danger of “following the herd” and investing in the bond market. He mentioned that one quarter of all bond inflows throughout the previous ten years happened within just ten months — signaling what he believes is “a sign of a bond bubble forming.”

Fund Managers Pessimistic but Hopeful

The Global Fund Manager Survey also revealed that majority of respondents still expect a soft landing despite decreased confidence levels overall with net 65% expecting weaker global growth compared 63% last month – highest result yet in 2023 . Nevertheless 63% surveyed managers still believe there will be soft landing following this period of economic slowdown .

What Are Bonds?

Bonds are debt securities similar to IOU or “I owe you” which governments , municipalities or corporations issue bonds make money by lending them money for some time . When you buy a bond , you lend your money to issuer collecting interests . Interest rate may vary depending on Federal Reserve’s policy .

Final Takeaways

This article takes us through Bank America’s recent report finding investors’ increased preference for bonds and cash reserves due uncertain economy outlook . Federal Reserve’s hawkish policy has caused worries among fund managers on possibility of forming bubbles while majority still hopes for soft landing despite pessimistic sentiment expressed by surveyed managers . Finally , it provides us with quick overview about what bonds are and how they work .