Bank of America
- Professional investors are the most bullish they've been on bonds since the depths of the Great Financial Crisis.
- An extended period of elevated interest rates has driven the bullishness in recent months.
- Rates need to fall going forward for the bullish bond trade to be profitable.
Our Chart of the Day is from Bank of America, which shows that investors are the most bullish on bonds since the depths of the Great Financial Crisis.
Professional investment fund managers surveyed by Bank of America said they are the most overweight bonds since early 2009. Only in March 2009 and December 2008 were they more overweight bonds than today.
But the surge in bullishness towards bonds is driven less by fear about the status of the global macro economy, as it was during the Great Financial Crisis, and is instead being driven by elevated interest rates.
A period of aggressive rate hikes from the Federal Reserve has pushed bond yields to levels not seen in more than 15 years, causing big losses in the fixed-income space because as yields rise, bond prices fall.
But expectations are rising that the Fed is done hiking rates, and investors see an opportunity for bonds to once again appreciate in price.
"The big change in the November Fund Manager Survey was not the macro outlook, but rather the conviction in lower inflation, rates, and yields," Bank of America's Michael Hartnett said.
As long as inflation continues to fall from its 2022 peak, and yields continue to trickle lower, bonds should perform well.
This was seen on Tuesday after October's CPI report showed inflation continued to cool, triggering a sharp decline in bond yields and a rise in bond prices.
Meanwhile, chances of another Fed rate hike in December plunged to near 0%, and it is increasingly likely that the Fed's next interest rate move will be a cut, not a hike. And that should bode well for bond prices.
Investors' bullishness towards bonds also spilled over into stocks, as falling interest rates are also typically bullish for stock prices.
According to the fund manager survey, investors increased their equity allocation from a 4% net underweight in October to a 2% net overweight in November.
"A stable macro outlook and much more optimistic view on rates has taken Fund Manager Survey investors' equity allocation overweight for the first time since April 2022," Hartnett said.