Half of U.S. institutional investors fear continued interest-rate hikes could trigger a liquidity crisis, according to a survey in January by research firm CoreData.
Among the 120 investors surveyed, 49% fear that crisis could "expose hidden fault lines in U.S. financial markets," according to a news release Thursday announcing the survey results.
As a consequence, 43% of surveyed investors say the Federal Reserve will be unable to raise the federal funds rate much past 5% due to the potential harmful economic impact.
The Federal Open Market Committee raised the federal funds rate to a range of 4.5% to 4.75% following its two-day meeting that concluded Feb. 1.
Despite those concerns, 55% of surveyed investors anticipate increasing their allocations to fixed income if the Fed does raise rates beyond 5%, according to the survey.
"On the one hand, institutional investors harbor deep concerns about higher interest rates triggering an economic tsunami whose waves will reverberate through the U.S. financial system," said Andrew Inwood, founder and principal of CoreData, in the news release. "But on the other hand, higher interest rates now offer better income opportunities after a prolonged and frustrating search for yield in the post-financial crisis low-rate environment. The income has finally returned to fixed income."
Within fixed income, 36% and 33% of surveyed investors anticipate increasing their allocations to investment-grade bonds and government bonds, respectively. Also, 32% said they will increase their allocation to cash and 25% said they will raise their allocation to private equity. Multiple answers were accepted.
Overall, just more than a quarter — 27% — of surveyed investors expect to see stagflation and a deep recession in 2023 accompanied by a fall of between 10% and 20% in equity markets.