The Bond Rush of 2024: Professional Investors Flock to Fixed Income

In a recent Bank of America Global Fund Manager Survey, professional investors are making a significant shift in their portfolios, flocking to bondsUnited States Treasury securities are debt instruments issued by the United States government to finance its spending. Treasury securities come in a variety of forms, including bil... More in a manner not seen since the end of the financial crisis. November’s survey reveals a growing consensus that fixed income is poised to become the best-performing asset class in 2024. This shift is driven by expectations of a soft economic landing and lower yields as the threat of inflation recedes. In this article, we’ll delve into the key findings of the survey and explore the reasons behind this dramatic move towards bonds.

A Noteworthy Change in Conviction

The most striking revelation from the November Fund Manager Survey is the shift in investor conviction towards lower inflation, rates, and yields. Bank of America’s investment strategist, Michael Hartnett, notes that this change in sentiment is evidenced by the third-largest overweight in bonds in the last two decades. This level of conviction has only been surpassed in March 2009 and December 2008, both significant periods marked by economic turmoil.

Bonds’ Redemption Amidst a Tumultuous Year

The rush towards bonds is happening in the wake of a tumultuous year for the asset class. Yields have surged to levels not seen in 16 years, causing concerns among investors. However, recent developments have caused a change in outlook. The shift in expectations regarding inflation and the belief that the Federal Reserve may have concluded its rate-hiking cycle are contributing factors.

Expectations of Lower Yields

The November survey overwhelmingly reflects expectations for a bond market reversal, with a record-breaking 61% of respondents stating that they anticipate lower yields in the coming 12 months. This prediction aligns with the fundamental relationship between bond prices and yields, where lower yields drive up bond prices.

Fed Policy and Yield Decline

The decline in yields is expected to be accompanied by a change in Federal Reserve policy. A significant 76% of survey participants believe that the central bank has finished its rate-hiking cycle. This is supported by recent economic indicators, such as a report showing that month-over-month inflation remained flat. Futures pricing also suggests a mere 5% chance of the Fed raising rates at its upcoming meetings.

The 2024 Investor Playbook

Michael Hartnett sums up the anticipated strategy for investors in 2024 as follows: “soft landing, lower rates, weaker US$, large-cap tech and pharma bull continues, avoid China and leverage.” In response to this outlook, investors are reducing their cash positions, which now stand at 4.7% of portfolios, down 0.6 percentage points from October. This drop falls below the 5% contrarian “buy” signal derived from the BofA survey.

Navigating Potential Risks

Despite the optimism surrounding bonds and the broader market, portfolio managers are not without concerns. Geopolitical factors have emerged as the top tail risk for 31% of respondents, indicating the recognition of potential global disruptions. Additionally, the possibility of a hard landing for the economy has moved up in the list of concerns, highlighting the fragility of the current economic environment.

Bottom-line: The rush towards bonds among professional investors, as indicated by the Bank of America Global Fund Manager Survey, marks a significant shift in market sentiment. The conviction in lower inflation, rates, and yields has not been this strong in over a decade. With expectations of a softer economic landing and lower yields ahead, fixed income assets are poised to outperform in 2024. However, investors must remain vigilant and navigate potential risks, such as geopolitical uncertainties and economic challenges, as they position themselves in this evolving landscape. As the year unfolds, the bond market will undoubtedly be a key focal point for investors seeking opportunities and stability in an ever-changing financial landscape.