BofA survey flags 27% bond risk as equity allocation hits 56%

Global fund managers are the most bullish since November 2021, yet disorderly bond yields have become their second-biggest fear.

Fund managers pushed equity allocation to a 56% net overweight in August, the highest since November 2021, as disorderly bond yields jumped to the second-largest tail risk at 27%.

"The dual sell signals — the FMS cash rule and the bull-bear indicator at 9.3 — suggest investors should consider retreating or rotating within risk assets rather than adding exposure," BofA Securities strategists said in the August Global Fund Manager Survey.

Cash fell to 3.5%, the sixth-lowest since 1998 records, triggering the FMS cash rule sell signal. The most crowded trade remains long global semiconductors at 53%, down sharply from an 82% peak last month. A record 56% of managers expect a "no-landing" scenario for the global economy over the next 12 months.

The survey, conducted Aug. 7-13 across 203 managers overseeing $581 billion, shows positioning stretched to levels that historically precede drawdowns. With 72% of managers expecting no Fed hike before the November midterms and Jackson Hole expectations skewed hawkish at 31% versus 7% dovish, the September FOMC meeting becomes the key test for whether crowded longs unwind.

The tail-risk picture shifted notably this month. "AI bubble" retained the top spot at 32% for a second consecutive month, but "disorderly bond yield rise" climbed from third to second at 27%, surpassing "second wave inflation" at 25%. The shift reflects growing concern that fiscal expansion and heavy Treasury supply could push long-end yields higher even as the Fed holds policy steady.

Corporate balance-sheet health also drew scrutiny. A net 19% of managers said corporate balance sheets are over-leveraged, the highest since March 2023 and up sharply from 7% last month. When asked about the most likely market reaction to a Democratic sweep in the midterms, 37% chose "bond yields rise, stocks fall" — a response that shows market wariness of fiscal expansion and its impact on the bond market.

AI: Both the Biggest Threat and the Strongest Conviction

AI-related questions revealed a sharp split. While "AI bubble" topped tail risks and 38% of managers identified AI hyperscaler capex as the most likely source of a systemic credit event — followed by private credit at 23% — 71% do not expect any AI hyperscaler to announce capex cuts in 2026, up from 61% last month. A further 58% expect AI's broad labor market impact to arrive no earlier than 2028, and 31% believe AI will not meaningfully disrupt the labor market at all.

This "worried but unwilling to reduce exposure" posture mirrors the overall crowded positioning. The survey's contrarian recommendations include long bonds/short commodities, long consumer staples/short tech, and long UK stocks/short US stocks.

Macro Expectations and Asset Allocation

A record 56% of managers expect a "no-landing" scenario — above-trend growth with above-trend inflation — over the next 12 months, up from 54% last month. The proportion expecting "boom" conditions rose to 43%, the highest since February 2022. Yet 49% also expect "stagflation," reflecting the tension in current macro narratives. Managers raised their year-end Brent crude target to $76 per barrel from $71.

In asset allocation, US stocks reached a 27% net overweight, the highest since December 2024. Emerging markets sit at 34% net overweight. Bonds remain deeply underweight at 39% net, while commodities are 24% net overweight — 1.4 standard deviations above their long-term average. A net 16% of managers consider gold underpriced, the highest since March 2023, while 39% view the dollar as overvalued, up from 34% last month.

On the political front, 47% expect a split Congress after the midterms — Democrats controlling the House and Republicans retaining the Senate. Only 23% expect a Democratic sweep, down from 27% last month.

This article is for informational purposes only and does not constitute investment advice.