Big fund managers are cold on bonds as inflation fears ease
A BofA Securities survey cited by MarketWatch shows investors underweight bonds despite softer expectations for inflation and Fed rates.
By Frankie Delgado · News Reporter
3 min read
Bonds are getting the cold shoulder from big money, and MarketWatch columnist Brett Arends says that may be exactly what makes them worth watching.
Arends, writing in a MarketWatch opinion column, pointed to the latest BofA Securities Global Fund Manager Survey as evidence that institutional investors remain wary of bonds even as their own outlook for inflation and interest rates has turned more bond-friendly.
According to BofA strategist Michael Hartnett and his team, a net 4% of investors in the July survey expected global inflation to fall. That marked a sharp turn from the prior month, when a net 45% expected inflation to rise, the BofA team said.
Rate expectations shifted too. BofA said a net 1% of surveyed investors expected higher short-term rates, down from 34% previously. The survey also found that 83% expected no Federal Reserve rate increase before the November midterm elections, while 14% expected one. Looking into next year, 36% expected at least one rate increase, compared with 29% who expected none.
That mix would usually give bonds a little shine. Bonds tend to benefit when inflation expectations fall, because the future income they pay becomes more valuable in purchasing-power terms.
Fund managers are not piling in, according to the survey. Arends cited one BofA measure showing a net overweight ratio of minus 34% for bonds. In plain English, more managers are holding less in bonds than their benchmarks than are holding more, by a margin of 34 percentage points.
Arends said the reading is not an all-time low, and he noted that some other BofA measures make bonds look less out of favor. Still, he described the broader picture as one where professional managers are leaning heavily toward stocks, especially U.S. stocks, while keeping lighter positions in bonds and cash.
BofA also described cash levels as unusually low, according to Arends. Cash, defined as instruments such as three-month Treasury bills, made up an average 3.6% of portfolios in the survey.
The survey ran from July 2 through July 9, before the reported breakdown of a cease-fire with Iran and before June inflation data came in softer than expected, Arends wrote.
Where retail investors can look
Arends listed several low-cost bond funds as examples available to ordinary investors. They included the Vanguard Total World Bond ETF, the iShares Core U.S. Aggregate Bond ETF and the Schwab U.S. TIPS ETF.
He described the Vanguard fund as split between U.S. and non-U.S. bond index exposure. The iShares fund, he wrote, holds U.S. Treasury and investment-grade corporate bonds. The Schwab fund invests in Treasury inflation-protected securities, known as TIPS.
Using a Securities and Exchange Commission standardized measure cited by Arends, the Vanguard Total World Bond ETF had an estimated yield of 4.23%, while the iShares Core U.S. Aggregate Bond ETF yielded 4.58%.
TIPS yields work differently because coupon payments depend on inflation. Arends cited U.S. Treasury data showing real yields on TIPS, meaning returns above inflation, ranging from about 1.9% to 2.9% depending on maturity.
The takeaway from Arends is contrarian: if the big players have already turned away from bonds, smaller investors may be looking at a market where prices have less crowd support and yields are still visible.
This story draws on original reporting from MarketWatch.