The biggest concern among fixed income investors’ is a “ Quantitative Failure ” according to the responses of Bank of America’s most recent Credit Investor Survey.
- Australian Real Estate: Not A Crash….Yet
- DTLA Preferred Stock: Hidden Value With A 50% Upside
- Macquarie: Central Banks Extending Kondratieff’s Autumn
- Alarm grows amid exuberance in corporate loans
The survey, which quizzes 55 institutional investors on the outlook for fixed income markets, is designed to poll sentiment among fixed income investors. It seems the biggest issue now on the minds of institutional fixed income investors is the quantitative failure, or rather, the failure of central banks to withdraw the punch bowl at an appropriate rate without upsetting markets. According to the survey, 23% of respondents now believe that this is the biggest risk facing markets, up significantly from June’s reading of 6%. This concern now eclipses the worry that bubbles are growing in credit markets. In June 33% of respondents indicated that this was the biggest concern, the figure has now fallen back to 21%.
Of particular concern regarding quantitative failure are policy actions from the European Central Bank. Investors say that “a backdrop of the ECB ending QE next year, while inflation remains sub-par, has the potential to rattle the market’s confidence.”
Around a third of respondents believe it will be a policy mistake if the central bank raises deposit rates to 1% over the next few years while 20% believe it will be a policy mistake if rates are increased by 50 basis points. 11% say a policy mistake will happen if rates are raised back to 0%. Therefore, Bank of America concludes, the fixed income market remains highly sensitive to any central bank actions.
Quantitative Failure prospect drives managers to record cash holdings
Against this backdrop, high yield investors have adopted an interesting strategy. According to the Bank of America survey, high yield investor cash levels have increased notably from 3.8% in June to 5.4% currently, a defensive move based on the fact “many remain skeptical towards a further rally”. Credit weights also remain at a below-average 24%. However, as well as increasing cash holdings high yield investors have reportedly increased their exposure to credit with the overall long positioning at its highest level since 2012 when the high yield survey began. Credit investors are now net overweight European high yield by 50%.
It seems institutional fixed income investors have been able to increase cash allocations while also increasing exposure thanks to robust cash inflows during the month of July. According to the survey, a net of 70% of high yield credit investors reported cash inflows into their credit funds over the last three months giving them the firepower to expand exposure and increase cash buffers to take advantage of opportunities when they arise. The additional cash will also act as a buffer against any missteps by central banks as they begin to wind back dovish monetary policy.