BofA Survey Reveals The Biggest Market Risk: A "Stagflationary Bond Crash"

Tyler Durden's picture

So much can change in just one week: where in the world "before Trump", every asset manager was prepared for "more of the same" gradual deflationary status quo grind under the Clinton administration, following the dramatic Trump victory everything has turned upside down, and now the overarching consensus - roughly a mirror image of what it was just last Monday - is for soaring inflation, rising US Dollar and risk assets, yet another "great rotation" out of bonds and into stocks, and perhaps an economic revival.

To be sure, in the latest just released BofA fund manager survey in which 177 clients managing just under half a trillion dollars were querried, the results were largely as expected as per the just reset conventional wisdom and as determined by the price action over the past 5 days.

In a nutshell, and as BofA puts it, "Inflation expectations surge", with global growth and profit expectations rise to one-year highs; inflation expectations soar to 12-year highs; number of investors expecting yield curve steepening surges by record amount…US election result seen as unambiguously positive for nominal GDP.

Here are some charts:

Global growth expectations jump to net 35% from net 19% last month. This is the highest reading in 12 months.

Global inflation expectations soar to highest % since Jun’04 (net 85% from net 70% last month).

Highest % of investors since Aug’13 think yield curves will steepen over the next 12 months (net 65% from net 31% last month). The is the biggest MoM jump on record!

Meanwhile, one the biggest laments heard repeatedly about the investing community, namely that it has been sitting on record amounts of cash, is now long gone: cash levels slump from 5.8% to 5.0% in Nov - the largest monthly drop since August 2009. According to Bank of America, this not yet a tactical negative... but it soon will be: a drop in cash to <4.8% in Dec would be a sell trigger, and furthermore a 1ppt fall in two months historically causes risk sell-off.

Just as notable as the cash inflow, has been the sector rotation: the election accelerated rotation into Banks, out of high dividend yield and bond proxies (e.g. Utilities, Telcos), and catalyzes buying of US equities, selling of Tech and Emerging Markets (biggest MoM drop since Feb’11). FMS shows growing conviction in “inflation trade”: majority of investors say cyclical rotation should continue “well into 2017”.

The chart above also leads BofA to recommend the following contrarian trades: long UK assets unambiguously contrarian (e.g. GBP = most “undervalued” on record). Long active vs. passive (FMS investors forecast market share of passive to rise to 40-49% equity AUM in 3 years). There will likely be a trade in “bond proxies” soon but our cyclical view of peak liquidity, globalization, inequality means the “yield” dam has been broken.

* * *

In terms of future return drivers, everyone is looking at bond yields, which is odd considering that these have soared at a record pace in the past week, something whic at least the Fed model finds as very bearish.

Adding to this, a net 82% of investors expect higher long-term rates in next 12 months. This is the highest % since 2013.

* * *

So what is the biggest risk according to the big money managers? According to BofA, the biggest tail risk is now a  “stagflationary bond crash”…crowded longs (Minimum Volatility, US/EU credit, long EM debt) remain vulnerable to further jump in yields. In contrast, political rhetoric to calm “protectionism" fears (which jumped to highest levels since 2009) would boost risk appetite.

Highest % of investors think protectionism is biggest risk to financial market stability since 2009.

FMS says biggest equity driver next 6 months by wide margin = Treasury yields (48%), followed by US dollar (24%).

And the punchline: stagflation expectations now close to 4-year highs as 22% of investors expect below-trend growth & above-trend inflation over the next 12 months.

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Looney's picture

 

following the dramatic Trump victory everything has turned upside down

Oh, the screaming, the fits, the tantrums, the tears… Aww…

George-Dubya’s election threw the Liberals into a tantrum too, but…

Remember what unified everybody in an instant, with a helping hand of Bandar Bush? Nine-fucking-Eleven!

Nothing brings people together better than FEAR.

If Trump doesn’t drain the swamp within a year or less, the Swamp will pull another 9/11.

I better be wrong.

He better hurry.

Looney

LawsofPhysics's picture

Be optimistic...

I think the "let the majority eat cake" monetary experiment is finally running it's course...

You will be busy soon enough.

Soul Glow's picture

What's important to remember about the bond market is that no one knows what bond prices do day to day like they do the stock market.  The afternoon radio will quote what the Dow closed at and the nightly news gives you the close of the indeces.  But unless someone goes to cnbc, Bloomberg, or a financial website they have no idea what bond prices did.

The reason I bring this up is because people won't notice if bond prices have collapsed until they get their quarterly statements.  Only then will they call their advisor and ask what happened.  So bond prices could get routed for a whole quarter and nobody will notice.  Trillions lost and not a peep from investors.  The sound of the bond collapse however will be deafening once it is realized boomers and the great generation have lost their retirement.

Planetary Books's picture
Planetary Books (not verified) Nov 16, 2016 2:37 PM

Time, perhaps, to reconsider the merits of gold. More and more added impetus will be coming its way as governments, increasingly desperate to seize the wealth of their citizens continue to do stupid things. Case in point: India's outrageous cash ban has already delegitimized the rupee and added a long-term increased demand factor for gold.

http://bit.ly/2g6JCiq

Soul Glow's picture

So you're saying cash bans and negative rates are going to have a boomerang affect on gold?  

Who da thunk it.

ThisUsernameFollowsTheRules's picture

I have my money earning a healthy 0.01% return in the bank, with the power of compound interest I can buy a steak dinner in 2050 then shoot myself in the head. Its the new retirement plan for millennials. 

bruinfan's picture

Not a word in this article is true.

small axe's picture

and when all else fails, call out HFT and the fake Reuters headlines

 

LawsofPhysics's picture

LOL!!!!  Now they come clean...

Fuck BofA, let them choke on their derivative paper...

scaleindependent's picture

No, they will make sure we drown on it first.

 

 

taketheredpill's picture

 

 

Ah yes....the Bond Bubble.  Best to sell now and jump into the relative safety of Equities.

Feck Off!

silverer's picture

It's all awesome. Just as planned. This is the Deep State's "plan B". If Hillary were to get in, she's run it into the ground in a planned sequence; confiscate guns, turn the place into a oligarch run park. Now that Trump is in, they can maybe speed it up. Start civil war, overthrow the Constitution with big outside money and subversion, and annex the US to instant third world status. Either way, they win. Or at least they think so.

Grandad Grumps's picture

I will invest in bonds when interest rates hit 16%.

buzzsaw99's picture

agree about the pound being undervalued v the usd but not the "buy uk assets" conclusion because while the pound may be undervalued "uk assets" in general (real estate, equities) are, imo, hideously overpriced. bofa must have some uk bank stocks to sell.