• According to a Bank of America (BofA) report, investors have been increasing their bond holdings and cash reserves in May, fearing a recession.
• The report revealed the highest bond allocations in 14 years, however, Ryan Payne from Payne Capital Management warned of a possible bond bubble forming.
• The majority of respondents polled in the survey expect a soft landing but are still pessimistic about global growth.
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. The May Global Fund Manager Survey revealed managers continue to increase their bond allocations to 14% from 10% the month before – constituting the highest allocation to bonds in the past 14 years. Bonds are debt securities issued by governments, municipalities or corporations in order to raise funds from willing investors who lend money for some time.
Danger of Bond Bubble Formation
Notably, Fed Chair Jerome Powell has been raising interest rates up to 5% in 10 consecutive revisions since Q2 2022 with the latest hike being reported in Q1 2023. This hawkish policy prompted Ryan Payne from Payne Capital Management (PCM) to call the bond market “a dangerous place” at this moment due to retail money inflow into bonds possibly forming a bubble.
Respondents Hopeful for Soft Landing
The May Global Fund Manager Survey also revealed that 63% of respondents still believe there will be a soft landing despite pessimism regarding global growth rising from 63% in April 2023 to 65%. 289 fund managers across $735 billion worth assets were surveyed for this report.
What is A Soft Landing?
A soft landing is an economic term used when describing an economy slowing down moderately following a period of growth and expected not to crash or enter into recession as opposed to hard landing which would trigger an economic downturn leading potentially into recessionary periods such as what happened during 2008 Financial Crisis due US mortgage crisis and subprime lending practices.
In conclusion, BofA’s survey reveals that while investors are increasingly allocating resources towards bonds due fears surrounding potential recessionary periods; nevertheless rate hikes pushed forward by Federal Reserve along with warnings from PCM could signal toward potential formation of dangerous financial bubbles within fixed income markets if left unchecked further leading potentially towards even worse financial outcomes than originally anticipated should these bubbles burst without proper preparation measures taken beforehand by authorities and market participants alike.