The world’s top investment funds have started piling into assets that act as stores of value – including commodities, cash, and real estate – in seeking to shield themselves against an anticipated drop in bond yields, new data from the Bank of America shows.
Funds with a combined $256 billion in assets under management (AUM) in January cut their positions in bonds, banks, and insurance companies as they predicted bond yields will drop sharply this year on the back of Federal Reserve interest rate cuts, BofA’s BAC, -2.07% Global Fund Manager Survey shows.
As of this month, a record 91% of fund managers surveyed expect short-term interest rates will drop over the next 12 months, up from 87% in Dec. 2023. Those figures mark the highest levels of bullish sentiment on interest rates since BofA’s surveys first started two decades ago in 2001.
Those same funds, in turn, plowed their money into assets that are likely to benefit from lower interest rates, including commodities and real estate, as bullishness on the prospect of short-term rate cuts hit record highs.
This movement saw investment funds cut their holdings in the banks and insurance companies that hold large quantities of bonds and also move out of bond markets themselves, as they also cut their investments in the U.K. and Japan.
Funds invested this money into assets which are likely to see their value buoyed by lower interest rates, including the real estate market, which saw investments hit 12-month highs. Lower interest rates act to bolster property markets by increasing the affordability of mortgages.
Investments in cash and commodities also surged as funds sought to capitalize on an anticipated uptick in their value, caused by a drop in the relative opportunity costs of holding those assets compared to bonds if yields fall.
Investment funds piled into of real estate, cash and commodities and pulled out of bonds, banks and insurance companies
Looking ahead, most funds surveyed (52%) said the Federal Reserve would have the greatest impact on equity prices in 2024, as more than two thirds (68%) said they believed the Fed would be the most important driver of bond yields worldwide over the coming year.
Investment funds predicted technology and biotech companies would be the main beneficiaries from falling interest rates, as investors predicted cheap access to capital will likely boost innovation-driven growth companies that invest heavily in R&D.
Overall, this saw the healthcare and tech sectors rank in first and second place as the industries in which investment funds were most heavily invested in as of January 2024. Investment funds were, meanwhile, most underweight on U.K. equities.
However, more broadly, investment funds remained more overweight on bonds and the U.S. economy compared to the past 20 years, as they remained underweight on the U.K. and eurozone economies over the same two-decade period.
The U.K. economy has achieved slower growth than all other G7 economies apart from Germany in the years since the start of COVID-19 in expanding by just 1.4% from the fourth quarter of 2019 to the third quarter of 2023, OECD figures show.
For comparison, the economies of the eurozone and Japan both grew 3% over the same period, while the U.S. economy expanded at a rate of 7.3%. Germany posted the slowest growth of any G7 country, expanding by just 0.3%.