Global fund managers have lifted cash holdings to 3.9 percent from 3.5 percent, pulling back 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 the recent wave of optimism fading.
Even amid 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 basic worry.
Bond market anxiety has become a top concern. Investors are net 48 percent underweight in bonds, the largest underweight position since May 2022, information from Bank of America. The most commonly cited risk is a sudden spike in bond yields. Some 33 percent of managers named it, 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. Information from the survey, 44 percent expect the US midterms to result in a split Congress, with a Democratic House and Republican Senate. 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 cut overweight bets on equities and commodities while maintaining a large underweight in bonds. In September, managers shifted into healthcare, industrials, and banks, while moving 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 reports that global bond markets are already under pressure, with the yield on the US 10-year Treasury approaching 5%. Bank of America strategists, led by Michael Hartnett, say risk exposure can increase 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, optimism about AI and economic growth is tempered by growing concerns over bonds and politics. The jump in liquidity is more than a technical move; it shows that professional investors are preparing for greater volatility and uncertainty. For now, managers are holding back on risk until the outlook for politics and bond markets becomes clearer.
