Investors snap up bonds and stocks in bet interest rates have peaked

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Investors have been dumping cash and piling into bonds and equities as conviction grows that big central banks have finished their cycle of interest rate rises, according to a closely watched survey of fund managers. 

Bank of America’s monthly poll, published on Tuesday, showed that in November fund managers had the biggest bet on rising bond prices since 2009. Three-quarters of the investors surveyed are now predicting that the Federal Reserve will not lift borrowing costs any further, up from 60 per cent in the previous month.  

“The big change in November was . . . the conviction in lower inflation, rates and yields,” wrote Michael Hartnett, investment strategist at Bank of America.

The “overweight” position in bonds reflects a growing belief among investors that a big sell-off in global fixed income, triggered by central banks’ historic campaign of monetary tightening over the past two years, is drawing to a close.

US Treasuries have recovered ground since yields hit a 16-year high last month, helped by the Fed holding rates earlier this month. The European Central Bank and Bank of England also kept borrowing costs steady at their latest policy meetings.

Fund managers have also warmed to stocks, favouring them in their portfolios relative to benchmarks for the first time in 19 months, according to the survey of investors controlling $553bn of assets. 

As investors moved into stocks and bonds, the average cash level fell from 5.3 per cent to 4.7 per cent, its lowest level since November 2021 and the largest monthly drop since January this year. 

The bullish turn comes as expectations for a so-called “soft landing” for the global economy have ticked higher, with just over a fifth of the managers surveyed now forecasting a recessionary “hard landing”, down from 30 per cent in October. 

In equity markets, tech stocks remain the most crowded bet after investors snapped up companies across the sector at the fastest pace since May, leaving them with their largest overweight position in two years.

Almost all of the S&P 500’s 15 per cent gain so far in2023 has been driven by the “magnificent seven” of Nvidia, Tesla, Meta, Microsoft, Alphabet, Apple and Amazon. 

Bank stocks, by contrast, remain out of fashion following the collapse of Silicon Valley Bank and a handful of other midsized lenders in March. A net 10 per cent of the managers surveyed by BofA were underweight in financials, up from a net 2 per cent last month.

Investors’ renewed enthusiasm for stocks has been focused on the US and Japan, which are now favoured relative to equities in Europe by the widest margin in 15 years.