Largest Ever One-Month Rotation into Bonds Signals Pessimism


Dec. 19 2018, Updated 11:25 a.m. ET

Biggest rotation into bonds

Another concerning statistic that came to light during the Bank of America Merrill Lynch’s Fund Manager Survey was that investors made the largest ever one-month rotation into bonds (BND). As reported by CNBC, the survey said, “Investors are approaching extreme bearishness…This month’s survey [found] the biggest ever one-month rotation into the asset class.” The bond allocations rose 23 percentage points to net 35% underweight, the highest allocation to bonds since the Brexit vote in June 2016. The allocation to bonds also rose amid a drop in inflation expectations. Just 37% of the respondents expect global CPI (TIP) to rise over the next year. This expectation has peaked at 82% in April 2018.

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Move out of equities

As we saw in one of the previous parts of this series, the allocation to global equities has fallen to a two-year low in December. Investors’ rotation from equities to bonds (AGG) is evidence of the existent risk-off market sentiment. Even within equities (SPY), this sentiment is evident with large moves into defensives such as staples (XLP) and utilities (XLU) from energy (XLE) and tech (QQQ) (XLK).

Turn defensive

Goldman Sachs (GS) also suggests investors turn defensive as uncertainty in stock markets (SPY) rises. GS also believes that a lot of the movements in the markets in 2019 will depend on investor perception of the longevity of the current economic expansion. Goldman Sach added that as per meetings with clients, investors do not sound optimistic and many believe that the US economy could enter a recession in 2020.


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