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Investors cut bond market allocation to 20-year low amid fears of a 'crash'

  • The market correction and spike on bond yields scared professional investors, according to the February Bank of America Merrill Lynch Fund Managers Survey.
  • Investors sliced bond allocations to their lowest level since 1998, with a net 69 percent underweight fixed income.
  • Cash allocations rose and exposure to stocks also declined.
Traders work on the floor of the New York Stock Exchange (NYSE) moments before the Closing Bell on February 8, 2018 in New York City.
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Traders work on the floor of the New York Stock Exchange (NYSE) moments before the Closing Bell on February 8, 2018 in New York City.

Fund managers have sliced their bond allocations to the lowest level in 20 years as fears grow that the sector poses the biggest threat to markets.

Along with reducing their fixed income exposure, 60 percent of professional investors also say inflation and troubles overall in the bond market pose the biggest threat of a "cross-asset crash," according to the February Bank of America Merrill Lynch Fund Manager Survey.

Respondents say they've reduced their bond portfolios to a net 69 percent underweight, the lowest since the survey began two decades ago. The survey polled 196 panelists with $575 billion in assets under management.

The results come amid a stock market correction that brought major averages down more than 10 percent at one point, and a spike in bond yields that sent the benchmark 10-year Treasury note to a four-year high.

Fears of a breakdown in the bond market did not push investors to stocks. The portfolio level dedicated to equities fell to a net 43 percent overweight, a 12 percentage point drop that was the biggest move in two years. Cash balances rose three-tenths from January to 4.7 percent.

"While this month's survey shows that investors are holding on to more cash and allocating less to equities, neither trait moves the needle enough to give the all clear to buy the dip," said Michael Hartnett, chief investment strategist at BofAML.

The firm's proprietary "Bull & Bear" indicator correctly flashed a sell signal for stocks in late January that Hartnett said is still in place.

Respondents overall grew more pessimistic amid the market turmoil after expressing positive sentiment for months.

They indicated that the bull market likely will peak with the S&P 500 at 3,100, or about 17 percent above Monday's close. Some 70 percent believe the global expansion is in the "late cycle," the highest reading in 10 years.

However, 91 percent still say a recession is unlikely and remain long in cyclical sectors including tech, banks, energy, emerging markets, Europe and Japan. Optimism over profits is at its highest level since 2011.