LONDON Oct 18 Global investors have raised cash
holdings back to post-Brexit highs and cut bond allocations to
10-month lows, nervous that bond prices are at risk of a
destabilising selloff, a Bank of America Merrill Lynch survey
showed on Tuesday.
The monthly survey of 213 fund managers with some $563
billion under management showed cash levels jumping to 5.8
percent from last month's 5.5 percent, back at the highs hit in
July following Britain's shock vote to leave the European Union.
The shift into cash came at the expense of traditional safe
haven bonds, with bond holdings cut to a net 50 percent
underweight from a net 45 percent underweight last month.
The bond allocation relative to cash is now at its lowest
level since July 2006. "Investors prefer holding (liquid) cash
to low-yielding bonds on the margin," BAML said, adding that 76
percent of respondents thought bond prices were too "frothy".
A crash in the bond market or rising credit spreads was
chosen as the second-biggest tail risk by 18 percent of
respondents, and a net 31 percent of investors expect yield
curves to steepen - the highest percentage since June 2014, the
The poll was carried out between Oct. 7-13, just after UK
gilts racked up their biggest weekly losses in more than a year
after an extended fall in the pound triggered fears that a surge
in inflation would undermine fixed income
U.S. and European government bond yields also hit four-month
highs in mid-October, with U.S. Federal Reserve chair Janet
Yellen warning that the Fed might have to run a "high-pressure
economy" to reverse the damage from the 2008-2009
BAML noted that global inflation expectations were now at a
16-month high of a net 70 percent, up from a net 61 percent last
month. Meanwhile, fears of stagflation, or low growth coupled
with high inflation, were at the highest since April 2013.
BAML said it was therefore no surprise that asset allocators
now have the largest emerging market equity positions in
three-and-a-half years, and are no longer underweight
commodities, as both are viewed as inflation hedges.
The emerging market equity allocation rose to a net 31
percent overweight from a net 24 percent last month, whilst the
commodities reading moved to neutral. This is the first time
investors have not underweighted commodities since December
The relative positioning of emerging markets versus
developed markets jumped to the highest level since February
2013, with a net 33 percentage point overweight.
Investors remained preoccupied with the broader
ramifications of Brexit, with 20 percent of respondents citing
EU disintegration as the number one tail risk.
A Donald Trump victory in the U.S. presidential election was
the second-biggest risk, picked by 17 percent.
The equity allocation rose to a seven-month high at a net 11
percent overweight, but UK equities remained out of favour,
falling to a net 27 percent underweight from a net 24 percent
(Reporting by Claire Milhench; Editing by Hugh Lawson)