Investor appetite for longer-dated U.S. bonds has surged following signals from the Federal Reserve that further interest-rate hikes are unlikely, potentially laying the groundwork for cuts later this year. According to a Bank of America (BofA) client survey conducted between May 3 and 8, a gauge of investors’ desire to extend portfolio duration has reached its highest level in a year and is near its most elevated point since the survey began in 2011. This change in sentiment indicates growing comfort among money managers with the idea that the Fed will cut rates later this year after Federal Reserve Chair Jerome Powell struck a less hawkish tone than anticipated.
Powell’s remarks, coupled with soft U.S. jobs data, have emboldened bond traders, pulling forward expectations for the Fed's first rate cut to November. The survey revealed that 49% of respondents named being long on rates as their highest-conviction trade of the year, a substantial jump from 30% in April. A separate report from Bank of America (BAC) showed global bond funds experienced their largest weekly inflows in over three years.
Market Overview:
Shifting Tides:
-The Fed's signal of slower rate hikes and a potential pivot towards cuts has dramatically altered investor sentiment in the bond market.
Duration in Demand:
-Measures of investor preference for long-dated bonds (sensitive to interest rate changes) have reached their highest levels in over a year.
Global Trend:
-The dovish stance of central banks worldwide is encouraging a similar move towards longer-dated bonds across various markets.
Key Points:
-BofA's survey shows a significant increase in investor conviction for holding long-dated US Treasuries, with nearly half of respondents viewing it as their top trade for the year (up from 30% in April).
-This shift follows the Fed Chair's less hawkish stance and weaker US jobs data, leading bond markets to anticipate a potential rate cut by November.
-The survey highlights a disconnect between investor sentiment and actual portfolio positioning, suggesting a potential buying spree for longer-dated bonds in the near future.
Looking Ahead:
-The Fed's monetary policy decisions will be closely monitored as investors look for confirmation of a dovish pivot.
-The demand for long-dated bonds hinges on the trajectory of interest rates and the pace of economic growth.
-Global central banks' actions and their impact on the foreign exchange market, particularly the weakening Japanese yen, are additional factors to watch.
"Powell triggered a dip-buying mentality by setting a very high bar for further hikes," wrote BofA strategists led by Ralf Preusser in the survey report. However, the survey also indicated a discrepancy between sentiment and actual positioning, with clients’ sentiment gauge and their exposure to long U.S. duration widening to a record gap. Nevertheless, the appetite for duration is not confined to the U.S. alone. A global sentiment gauge is at its highest since 2021, with the European Central Bank and the Bank of England signaling potential interest-rate cuts as early as next month.
Meanwhile, BofA’s clients are increasingly bearish on the Japanese yen, flipping from a long-held bullish stance. The yen slumped to a three-decade low versus the dollar last month, prompting suspected intervention from Japanese authorities. “There is deep skepticism around the effectiveness of Japan’s FX intervention,” the strategists noted, with most survey respondents expecting the yen to retest 160 per dollar, while none see it recovering to 150 per dollar.
