Investors see transitory inflation and peaceful Fed taper – BofA survey

Taper tantrum remains the top tail risk for the market

Some interesting tidbits from the latest BofA survey:

72% of managers believe that inflation is a temporary phenomenon
63% of managers believe that the Fed may begin to wind down QE in Aug/Sept
Long commodities overtook Bitcoin as ‘most crowded trade’
81% of investors still believe cryptocurrency is in “bubble” territory

LONDON (Reuters) – The majority of investors surveyed by BofA believe inflation is transitory and expect the U.S. Federal Reserve to signal a dial back in monetary stimulus by September, the investment bank said on Tuesday. Unprecedented stimulus sparked worries about inflation earlier this year, driving U.S. 10-year borrowing costs to 1.8% in March and spooking stock markets. But those concerns have abated recently, pushing stocks to record highs and benchmark U.S. bond yields back below 1.5%. “Investors (are) bullishly positioned for permanent growth, transitory inflation and a peaceful Fed taper,” said Michael Hartnett, chief investment strategist at BofA, adding that 63% of the investors believe Fed will signal a taper by September.

Some 72% of investors said inflation was transitory, according to the June BofA survey.

Still, inflation and a “taper tantrum” — a selloff related to the Fed scaling back its quantitative easing programme — remained the top tail risks for markets, BofA’s survey of 224 fund managers with $667 billion in assets under management showed. BofA said the investment cycle was shifting from early to mid-cycle and that investors don’t expect a recession until 2024 at the earliest.Investors said value stocks, so-called because they trade at …

Though the majority of investors in the survey said equities were not in a bubble, BofA said positioning was peaking with a near-record 62% of investors “overweight” on stocks.

Unprecedented stimulus measures to tackle the COVID-19- induced recession have now sparked worries about inflation, prompting investors to raise their rate hike expectations. Worries that the U.S. Federal Reserve would scale back – or “taper” – its quantitative easing programme was seen as the biggest risk among investors. Discussions about a minimum global corporate tax rate and a rise in the corporate tax rate in the United States in the past few weeks have soured the outlook for equities. Investors’ cash allocation rose to 4.1% last week versus 3.8% in February, the survey showed.After soaring 82% from March 2020 lows and scaling $90 trillion in market capitalisation, world stocks are holding up near record highs. Still, two-thirds of the 200 panellists with $553 billion in assets under management said U.S. equities were in a late-stage bull market. Only 7% think U.S. stocks were in a bubble. Six out of ten investors surveyed by BofA now expect a rise short-term rates in the next 12 months, the highest since January 2019. But they expect a more than 10% pullback in stocks if U.S. 10-year Treasury yields hit above 2.1%. The benchmark 10-year yield is now hovering near 1.70%, holding below a 14-month high of 1.776% reached on March 30.