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Government bonds are now the 'most crowded' market trade, more popular than technology stocks

Key Points
  • Investor preference for U.S. government bonds is now the market's "most-crowded" trade, according to the June Bank of America Merrill Lynch Fund Manager Survey.
  • The switch comes amid rising fears of a spreading trade war and bearish bets not seen since the financial crisis.
  • Expectations for corporate profits fell by the largest margin in the survey's 23-year history.

Professional investors are heading for cover, making the rush into government bonds the most-crowded trade in the latest Bank of America Merrill Lynch Fund Manager Survey.

The move marks the first time investor preference for Treasurys has topped the list, in a portion of the closely watched survey that goes back to late 2013. U.S. government bonds, cited by 27% of respondents, pushed the long-popular technology trade out of first place. Tech (26%) slid to second, followed by long U.S. dollar(18%) and short European stocks (9%).

The move is part of a larger trend that saw the survey's 179 participants move away from risk and toward positions that reflect fear of a coming economic slowdown spurred by a spreading trade war. The survey took place from June 7-13, so it reflects the period after some high-profile sparring between the U.S. and Mexico that stirred fears of another front in the tariff battle.

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In terms of positioning, investors moved to cash at numbers not seen since the U.S. debt ceiling standoff eight years ago. They shed positions in global stocks to their lowest allocation since the financial crisis bottom in March 2009, and increased bond allocations to an overweight level not seen since September 2011.

As earnings season approaches, expectations for corporate profits plunged 40 percentage points, with a net 41% now expecting deterioration over the next year. That is the biggest one-month plunge in the 23-year history of the fund manager survey.

On the economy, expectations for growth tumbled by a record 46 percentage points, with 50% of respondents on net expecting growth to weaken in the next 12 months.

Survey respondents "have not been this bearish since the Global Financial Crisis, with pessimism driven by trade war and recession concerns" Michael Hartnett, chief investment strategist at BofAML, said in a statement. "The tactical 'pain trade' is higher yields and higher stocks, particularly if the Fed cuts rates on Wednesday."

Positioning for the Fed

Investors are watching what happens with this week's Federal Open Market Committee meeting, with the U.S. central bank largely expected to keep its benchmark rate steady but to tip its hand to a cut in July. Market participants expect two additional quarter-point easing moves before the year ends.

Positioning in the $15.9 trillion U.S. government bond market reflects a conviction that yields are going to fall, as they have done sharply. ETF investors have poured more than $66 billion into bond funds in 2019, about double the amount of equity inflows. Falling yields mean higher prices and better returns for funds.

The biggest beneficiaries of the move have been funds that deal in the Treasury market. For instance, the iShares 7-10 Year Treasury ETF has seen $5.3 billion in inflows, about a 49% increase in assets, while the iShares 20+ Year Treasury ETF has received just over $5 billion in inflows, an increase of 54% in assets.

Bonds haven't been the only beneficiary of investor angst.

Cash balances have surged, rising to 5.6% of total portfolio allocation, the biggest jump since August 2011 and a full percentage point above the 10-year average.

Asset allocation overall is "implying recessionary conditions," the survey said, with the second-biggest monthly drop ever on the equity side and the second-lowest total to stocks. The difference between allocations to stocks versus bonds fell to 1%, the tightest since May 2009, just two months after the stock market bottom.

Worries over the trade war continue to lead by a large margin of the things keeping investors awake at night.

The issue was cited by 56% of respondents as the top "tail risk," followed by monetary policy "impotence" (11%), U.S. politics (9%) and a slowdown in China (9%).