LONDON (Reuters) – Investors have nudged their cash allocations higher, suggesting a slight increase in concerns that inflation and “taper tantrums” could topple a record rally in financial markets, BofA’s March fund manager survey showed on Tuesday.
Unprecedented stimulus measures have sparked worries about inflation, driving U.S. 10-year borrowing costs to more than one-year highs of 1.62%.
That has dovetailed with speculation that central banks might start withdrawing their support, a combination that triggered market panic in 2013 when investors learned that the U.S. Federal Reserve was scaling back – or “tapering” – its quantitative easing programme.
Fund managers surveyed by BofA increased their cash allocation to 4% from 3.8% in February.
A rise above 2% in U.S. 10-year Treasury yield could cause more than a 10% correction in stocks, 43% of them, with $630 billion in assets under management, said. Just over a third said a rise to 2.5% could make bonds attractive relative to stocks.
Though the quickfire bond selloff in recent weeks dented tech stocks, wiping hundreds of billions from the sector’s market capitalisation, ‘long tech’ remained the most crowded trade in the survey.
However, investors had the lowest overweight on the sector since January 2009, just as markets started recovering from the 2008 financial crisis.
Investors typically are willing to pay more for near-term growth when rates rise as cyclicals tend to do well in the early days of economic booms.
Rising rates have also prompted a rush to commodities. Investors are currently their most optimistic on commodities in the survey’s near two-decade history.
A 81% jump in U.S. stocks from COVID-19 lows hit in March last year have kicked off bubble worries, but investors in BofA downplayed it.
Only 15% think U.S. equities are in a bubble, 25% say it’s an early-stage bull market and 55% say a late-stage bull market.
Graphic: Divi yield versus bond yields – https://fingfx.thomsonreuters.com/gfx/buzz/jznpngkllvl/Pasted%20image%201615890086078.png