Bond Markets Rise Against Sour Predictions, Says Bank of America

Key Takeaways:

• Bonds and cash reserves are on the rise, says Bank of America.
• Is the inflow dangerously forming a bond bubble?
• BofA report respondents are pessimistic about the market, albeit hopeful for a soft landing.

YEREVAN (CoinChapter.com) – 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. According to the survey, it is the highest allocation to bonds in the past 14 years.

In detail, bonds are debt securities, similar to an IOU (phonetic acronym of the words “I owe you”). Governments, municipalities, or corporations issue bonds to raise funds from investors willing to lend them money for some time. When you buy a bond, you lend to the issuer, collecting interest.

Bonds do not represent ownership, and their yield may vary depending on the Federal Reserve’s policy. 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 a recent interview with Reuters, Payne commented on the danger of “following the herd” and investing in the bond market.

He mentioned that a quarter of all bond inflows throughout the previous ten years happened in the last ten months. “That’s a sign of a bond bubble forming,” saying that a big retail money inflow is going into the same place, “bonds specifically.”

BofA report does not reflect market confidence.

Meanwhile, the May Global Fund Manager Survey also revealed that the majority of respondents still expect a soft landing.

BofA referenced 289 fund managers in the survey, which oversee a total of $735 billion in assets. According to the results, net 65% expect weaker global growth, up from 63% the month before and the highest result yet in 2023. However, 63% of the surveyed managers still believe there will be a soft landing.

In detail, the latter is a period of a moderate economic slowdown following a period of growth. That’s what the Federal Reserve can hope for after raising interest rates.

Also, 27% of the respondents forecasted a hard landing. 4% saw “no” landing at all, and the survey did not provide an answer for the remaining 6%. Most respondents anticipated the US debt ceiling fiasco to resolve, but the hopeful percentage has slipped from 80% to 71%.

Also read: US Debt Ceiling Crisis Looms as Treasury Secretary Again Warns of Impending Default.