Global fund managers warn of stock market correction if yields surge to 2%; covid-19 risk no more


Bond yields have been inching higher in the last few weeks, rebounding strongly from 0.5% in the middle of last year.
(Image: REUTERS)

Bond yields have been inching higher in the last few weeks, rebounding strongly from 0.5% in the middle of last year. If yields continue to push higher and breach the 2% barrier, a 10% stock market correction could be in the offing, according to a survey of global fund managers conducted by Bank of America. Adding to this, the survey highlighted that fund managers believe that if yields touch 2.5%, bonds are likely to become more attractive than stocks.

Currently, the 10-year Treasury yield is sitting near 1.6%, down after having breached 1.7% last week. Yields have moved higher as inflation worries mount and global economic recovery takes shape. “Nobody believed that rates at 1.5% would cause an equity correction. But the move from 1.5% to 2% is critical as 43% of investors now think 2% is the level of reckoning in the 10-year Treasury that will cause a 10% correction in stocks,” BofA said.

Coronavirus no longer the biggest risk

After a year of the coronavirus pandemic, fund managers across the globe have stopped seeing the coronavirus as the biggest tail risk. 37% of the fund managers surveyed now believe that inflation is a bigger risk for equities and 35% believe taper tantrum to be a risk. Less than 15% of portfolio managers see vaccine rollout to be a risk for markets. 

Strong economic outlook

Though worried about inflation, economic expectations are bullish. 48% of the fund managers said that it is a V-shaped recovery for the economy. Only 10% of the respondents agreed to a V-shaped economic recovery in May last year. A strong 91% expects a stronger economy in the post-pandemic era. 

No bubble in markets

The idea that US stock markets are in a bubble does not find consensus among the fund managers. Merely 15% believe that stock markets are in a bubble at this juncture. Whereas 25% think equities are in an early stage bull-market while 55% believe it to be a late-stage bull market.

In the cyclicals vs defensives, debate fund managers have taken the side of cyclicals. Exposure is highest in commodities, followed by industrial and banks. Positions in technology, telecom, healthcare, and materials have been trimmed by investors.


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