Concern about the current trade war with China is causing money managers to be the most bullish they've been on rates since the global financial crisis, according to Bank of America Merrill Lynch's monthly fund manager survey released Tuesday.
Of the managers surveyed, 43% expect lower short-term rates, while only 9% expect higher long-term rates over the next 12 months. Combined, it is the most bullish view on fixed income since November 2008.
One-third of managers surveyed (34%) expect a global economic recession is likely to occur over the next 12 months — the highest expectation of a recession from survey respondents since October 2011 — while 64% of respondents think it's unlikely.
A net 25% of managers say fiscal policy is too restrictive, and just 11% say monetary policy is "too stimulative," according to survey results. Taken together, it is the most hawkish policy mix since November 2016.
In addition, a record 50% of managers are concerned about corporate leverage: 46% say they want corporations to use cash flow to improve balance sheets; 36% prefer to see them increase capital expenditures, while 13% indicate they would like to see corporations return cash to shareholders through dividends or buybacks.
Corporate bonds are most vulnerable to a classic investment bubble given the current course of central bank policies, according to 33% of respondents. Government bonds come in second, at 30%, followed by U.S. equities (26%) and gold (8%).
Meanwhile, 71% of respondents believe that the 10-year U.S. Treasury will not trade below 1% in the next 12-18 months.
The allocation to fixed income rose 12 percentage points with a net 22% of managers saying they are underweight in their positions, the highest allocation since September 2011. Meanwhile, the allocation to global equities fell 22 percentage points to a net 12% underweight.
Although emerging markets remain the most favored, the asset class fell 11 percentage points to a net 12% of managers overweight. U.S. equities come in second, with just a net 2% of managers overweight.
Allocation to eurozone equities dropped 12 percentage points to a net 3% of managers underweight.
A net 15% of managers say they would like to be overweight to U.S. equities over the next 12 months, despite 78% of respondents believing the asset class is overvalued.
A net 51% of respondents put concerns of a trade war at the top of a list of worries, well above monetary policy impotence (15%), a slowdown in China (9%) and a bond market bubble (also 9%) as the other top concerns.
"Investors are the most bullish on rates since 2008 as trade war concerns send recession risk to an 8-year high," said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research, in a news release about the survey results. "With global policy stimuli at a 2 1/2-year low, the onus is on the Fed, ECB and (People's Bank of China) to restore animal spirits."
The survey of 224 money managers representing a total of $553 billion in assets under management was conducted Aug. 2-8.