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Investors are more bullish on bonds that at any time since November 2008, with net 43% expecting lower short-term rates and only net 9% expecting higher long-term ones over the next 12 months, according to Bank of America Merrill Lynch’s August global fund manager survey.

Thirty-four percent of investors said they expected a recession in the next 12 months, while 64% did not think one was likely.

This marked the highest recession probability since October 2011, Merrill noted, and was in line with the firm’s U.S. economists, who think there is close to a one in three chance of a recession in the next 12 months.

“Investors are the most bullish on rates since 2008 as trade war concerns send recession risk to an eight-year high,” Merrill’s chief investment strategist Michael Hartnett said in a statement. “With global policy stimuli at a 2.5-year low, the onus is on the Fed, ECB and [People's Bank of China] to restore animal spirits.”

Concerns about a trade war dominated the August survey’s list of tail risks, cited by 51% of investors. Fifteen percent worried about monetary policy impotence and 9% each about a China slowdown and a bond market bubble.

The survey was conducted Aug. 2 to 8 among 224 panelists with $553 billion in assets under management.

Net 25% of investors surveyed said fiscal policy was too restrictive, and just net 11% said monetary policy was too stimulative; combined, this was the most hawkish policy mix since November 2016, the report said.

Merrill pointed out that 12 months ago, 90% of fund managers expected higher short-term and 64% expected higher long-term rates.

The survey found that record net 50% of investors worried about corporate leverage. Forty-six percent said they wanted corporates to use cash flow to improve their balance sheets; 36% preferred to see corporates increase capital expenditure and 13% said corporates should return cash to shareholders via dividends or buybacks.

Thirty-three percent of respondents said that corporate bonds were the asset class most vulnerable to a classic investment bubble, given current central bank policy trends, followed by 30% who said this of government bonds, 26% of U.S. equities and 8% of gold.

In the August survey, fund managers’ growth expectations fell close to recent lows, down 18 percentage points from the July survey to net 48% who expected global growth to weaken over the next 12 months.

According to 71% of respondents, the 10-year U.S. Treasury will not trade below 1% in the next 12 to 18 months.

Allocations

Fund managers’ cash level fell to 5.1% from 5.2% in July, still well above the 10-year average of 4.6%. Their cash allocation held steady at 41% overweight, also considerably above the long-term average.

The fund manager cash rule has now been in “buy” territory for the past 18 months. The rule holds that when average cash balance rises above 4.5%, a contrarian buy signal is generated for equities. When the cash balance falls below 3.5%, a contrarian sell signal is generated.

Allocation to bonds surged 12 points to net 22% of fund managers who reported that they were underweight, the highest allocation since September 2011, according to Merrill.

Investors’ August allocation to global equities retraced nearly all of July’s uptick, plummeting 22 points to 12% underweight.

Emerging markets remained atop the most-favored regional list, albeit on a downward trend. Net 12% of investors said they were overweight the asset class, down 11 points from July. U.S. equities followed, with net 2% of investors overweight.

Allocation to eurozone equities was the big loser in August, down 12 points to net 3% of fund managers reporting that they were underweight. Fund managers’ allocation to Japanese equities slumped five points to 9% underweight, a seven-year low.

Looking ahead, net 15% of investors surveyed said they would like to be overweight U.S. equities over the next 12 months, even though 78% considered the region overvalued. Merrill said the combination of these two points marked the second most extreme level on record.

Thirty-two percent of fund managers put long U.S. Treasuries at the top of the most-crowded trade list in August, well ahead of 19% who said long U.S. tech, 15% long growth stocks and 12% long investment-grade corporate bonds.

— Check out Have We Hit a Soft Patch, or Are We Marching to Recession? on ThinkAdvisor.