Fund managers have raised cash levels to 3.9 percent, reflecting growing unease over bond volatility and US political uncertainty. While enthusiasm for AI investments remains, risk appetite is cooling.
Global fund managers have increased their cash holdings to 3.9 percent, up from 3.5 percent, signaling a move away from risk as concerns mount over unstable bond markets and the possibility of a Democratic sweep in the upcoming US midterm elections. The latest Bank of America September survey shows that the recent wave of optimism is fading.
Even with the current volatility, many investors remain confident in the broader economic outlook and the ongoing surge in AI-related capital spending. A net 8 percent still expect global growth to pick up, and more than half see no economic downturn ahead. Only 2 percent anticipate a hard landing, while 38 percent expect a soft landing. Still, risk appetite is cooling: a record 33 percent now cite corporate overinvestment as their main worry.
According to Bank of America, investors are now net 48% underweight in bonds—the largest underweight position since May 2022.
Bond market anxiety is now a top concern. The most commonly cited risk is a sudden spike in bond yields, with 33 percent of managers highlighting this issue—up from 27 percent in August. For the first time since September 2022, more investors expect the yield curve to flatten, reflecting doubts about the Federal Reserve's ability to keep up with market shifts. Only 16 percent think Treasury buybacks will be enough to lower yields.
Political risk is also shaping investment decisions. According to the survey, 44 percent expect the US midterms to result in a split Congress, with a Democratic House and Republican Senate. But the chance of a full Democratic sweep has risen to 31 percent, and most investors believe this would push yields higher and send stocks lower.
Fund managers have adjusted their positions in response. They have reduced overweight bets on equities and commodities, while keeping a large underweight in bonds. In September, there was a shift into healthcare, industrials, and banks, and out of REITs and consumer staples. The most crowded trade remains long global semiconductors, with 53 percent of managers still backing the sector. Meanwhile, 42 percent now see AI hyperscaler capital spending as the most likely trigger for a credit event, up from 38 percent previously.
Reuters notes that global bond markets are already under pressure, with the yield on the US 10-year Treasury approaching 5%. This backdrop helps explain the heightened anxiety among fund managers, as rising yields globally have become a central theme in recent surveys.
Bank of America strategists, led by Michael Hartnett, say risk exposure can be increased when liquidity returns to a neutral 4 to 5 percent range. For now, their contrarian trade ideas include going long UK equities and short US stocks, long consumer staples and short banks, and favoring small caps over large caps.
As reported by Investing.com, the data points to a market where optimism about AI and economic growth is being checked by real concerns over bonds and politics. The jump in liquidity is more than a technical move—it shows that professional investors are preparing for more volatility and uncertainty. For now, caution is the rule, and risk-taking is on hold until the outlook for politics and bond markets becomes clearer.
