Global fund managers are going crazy buying bonds! Optimism reaches its highest level since the financial crisis.

The latest monthly survey report released by Bank of America shows that fund managers' optimism towards bonds has reached its highest level since the financial crisis, as they believe that interest rates will decrease next year. The overweight position in bonds has reached a new high since 2009.

Analysts say that this "big shift" is not due to a change in views on the macro economy, but because fund managers expect inflation and bond yields to decline next year. Over the past three months, the yield on 10-year US Treasury bonds rose above 5% last month, reaching a new high since 2007, due to concerns that the Federal Reserve will continue to raise interest rates and keep benchmark rates high. However, the last Fed interest rate meeting alleviated some of these concerns, and asset prices rebounded in November.

Bank of America surveys fund managers every month to ask when the current Fed rate hike cycle will end. A total of 225 fund managers participated in the survey, managing a total of approximately $553 billion in assets. The survey shows that fund managers' belief that US interest rates have peaked has reached a new high since the survey began. 76% of fund managers believe that the current Fed rate hike cycle has ended. 61% believe that interest rates will decrease in the next 12 months, prompting more conservative investors to reduce their cash positions from 5.5% to 4.7%, the lowest level in two years.

Although 57% of fund managers expect the global economy to continue to weaken next year, 74% believe that the economy will achieve a soft landing or will not land at all. This has also led to a net overweight position of 2% in the stock market for fund managers, the first time since April 2022.

The fund managers surveyed mainly hold positions in pharmaceutical stocks, technology stocks, and telecommunications stocks. They are optimistic about large-cap technology stocks and long-term US bonds, but not optimistic about utilities, materials, and consumer staples. In addition, investors expect interest rate cuts and a weaker US dollar in 2024. The survey shows that investors have increased their holdings of US and Japanese stocks, while reducing their holdings of the eurozone and British stocks.

Earlier, it was reported that Morgan Stanley's long position in US Treasury bonds rose by 4 percentage points, reaching the highest level since November 2010, while the neutral position decreased by 4 percentage points, and the short position remained unchanged.

Guggenheim Investments previously predicted that the Federal Reserve will no longer continue to raise interest rates in the future meetings and will keep its policy rate at the highest level in 22 years, 5.25%-5.5%. However, the US economy may still enter a recession in the first half of next year, which will force the Federal Reserve to cut interest rates quickly. Therefore, investors should ignore the current bleak bond market and prepare for the bond market recovery brought about by the Fed's shift to rate cuts.

In this context, Guggenheim is more optimistic about agency mortgage-backed securities (MBS), expecting a return of approximately 6%. A-level structured bonds will generate returns of about 8% to 9%, and the return rate of certain BB-level high-yield bonds will reach about 9%.

As for US Treasury bonds, many Wall Street investment banks have previously claimed that they have bottomed out, and large institutions including Vanguard, Pimco, and BlackRock have been buying US Treasury bonds. The industry unanimously believes that the worst sell-off in US Treasury bonds is over. The latest media survey shows that nearly 90% of respondents believe that the yield on 10-year US Treasury bonds has peaked or will not rise above 5.5%. CICC previously released a research report stating that next year, the endogenous demand in the United States may further decline, gradually suppressing economic expansion, and the US economy may gradually decline. As economic momentum weakens and recession risks rise, the monetary policy of the Federal Reserve may shift back to easing. At the same time, the increase in global uncertainty events will boost risk aversion, and the demand for US bonds may also be strengthened, leading to a potential turning point in US bond yields.

However, some investors are not optimistic about the prospects of a rebound in US bonds. Michael de Pass, Global Head of Rates Trading at Citadel Securities, stated that the US bond market is still very dependent on data, so market sentiment may change. Jamie Dimon, CEO of JPMorgan Chase, warned that in the case of stronger inflation stickiness, the Federal Reserve may still raise policy rates by 75 basis points. Stephen Dainton, Co-Head of Global Markets at Barclays, stated that it is highly unlikely that the Federal Reserve has completed the entire tightening policy.