Bonds Gain Fund Managers' Favor

The bond party might just be heating up, according to a recent survey of fund managers, thanks in large part to pessimism about global growth, concerns about future corporate earnings and this month's pause in interest rate hikes.

Fund managers are reassessing their long-standing negative view on bonds, according to Merrill Lynch's survey of fund managers for August, which was released Tuesday. Only 22% of fund managers perceive global bond markets to be overvalued, down from 35% in July.

Moreover, asset allocators have begun to reduce their underweight stance on bonds for the first time in three years, the survey said. Roughly 46% of the panel said they are underweight bonds, compared with 65% in June.

"This is consistent with the shift in the broader economic outlook from one of steady or even above-trend growth to one where even the Federal Reserve and FOMC is expecting growth to taper," says Ian Lyngen, a Treasury strategist with RBS Greenwich Capital.

While Lyngen emphasizes that few economists predict a recession, he adds that slower growth means equities should underperform relative to where they would without a slowdown. In this scenario, allocation into fixed-income markets makes sense, he says.

"The big call this autumn is shaping up to be: Will this liquidity be directed back into equities or could it head for the bond market instead?" David Bowers, joint managing director of Absolute Strategy Research, wrote in the Merrill Lynch release. ASR analyzed the survey results.