The coronavirus was outbid for the first time since the early days of the pandemic, more than a year ago, as the biggest risk that keeps investors awake at night, according to a new survey by fund managers.
Money managers heard by Bank of America now see inflation and an undisciplined increase in borrowing costs, as seen during the 2013 “cholera crisis” as the main “tail risk” that can upset global markets.
The survey of investors with $ 597 billion in managed assets highlights investors’ concerns that Covid-19’s economic recovery, supported by unprecedented stimulus, could trigger a wave of price growth that can be difficult to control.
Rising inflation expectations and bets that central banks, especially the U.S. Federal Reserve, may have to tighten policy earlier than planned, triggered a widespread sale in government bond markets – which investors fear that could get worse.
“It’s a drag on the Fed,” said Jim Caron, portfolio manager at Morgan Stanley Investment Management. “They want to communicate that they will be patient, but the more patients they are, the more people will be concerned about inflation.”
Investors in the BofA survey expect inflation to rise, at least in the short term, with a 93% rise in survey managers predicting faster price increases next year. Most now see higher economic growth walking hand in hand with higher inflation. Previously, investors were more optimistic about a “goldilocks scenario” of lower inflation combined with strong growth.
“We believe that 2020 probably marked a secular low for inflation and interest rates,” said Michael Hartnett, chief investment strategist at BofA, last week.
Expectations of rising inflation have generated shock waves in the bond market this year, as inflation erodes interest payments on bonds. The 10-year US Treasury yield, one of the most watched interest rates in the world, increased by more than 1.6%, up from 0.9% at the beginning of the year, as investors sold the debt. Meanwhile, the 10-year equilibrium rate, a key measure of inflation expectations, is now close to its highest level since 2014.
Traders are concerned about the recurrence of the 2013 cholera crisis, when the prospect of withdrawing the Fed’s stimulus after the global financial crisis generated a strong bond sale.
“Previous episodes have shown that what begins as a benign correction can evolve into a tantrum with wider consequences. Our modeling of a severe market scenario has a significant impact on growth, ”said Innes McFee, global chief economist at Oxford Economics.
A large part of the fund managers in the BofA survey said that a 2% yield on 10-year Treasury bonds would lead to a correction of at least 10% in the stock markets.
Investors reported the biggest cut in 15 years in their exposure to technology stocks, which suffered during the bond market crash. Technology bets were still considered the “most competitive trade”, followed by bitcoin and ESG.
The reading on investor fears comes on the first day of the Fed’s two-day monetary policy meeting. Central bankers have reduced the risk of inflation and reinforced that they have no plans to raise rates until Covid-19’s economic recovery is over. well underway.
“The Fed’s challenge is to manage the transition from a low to high interest rate regime without causing market confusion,” said ING analysts before Wednesday’s Federal Open Market Committee decision.