Bank of America Global Fund Manager Survey: Bond Market Out of Control Becomes the Second Largest Tail Risk, Only After the AI Bubble

Global fund manager sentiment has reached its highest level in recent years, but a warning signal of disorderly rising yields is quietly emerging.

According to Bank of America Securities' August Global Fund Manager Survey, investor sentiment is at its third highest since 2022, with global equity allocation at its highest since November 2021 and cash allocation down to 3.5%, the sixth lowest in history. At the same time, risk signals are becoming increasingly clear: "Disorderly bond yield rise" climbed to the second biggest tail risk at 27%, only behind the "AI bubble" (32%), which has topped the list for two consecutive months.

This survey was conducted from August 7 to 13, involving 203 fund managers with a total asset under management of $581 billion. The results triggered Bank of America's two major contrarian indicators—the FMS Cash Rule and the Bull & Bear Indicator—to simultaneously issue "sell" signals, highlighting that current positioning crowding is approaching historical extremes. Bank of America strategists suggest that rather than continuing to increase positions, investors should consider retreating or rotating within risk assets.

Regarding policy expectations, 72% of respondents believe that the Federal Reserve will not raise interest rates before the mid-term elections. As for the upcoming Jackson Hole Annual Meeting from August 27 to 29, 53% of investors expect Fed Chair Kevin Warsh to maintain a neutral stance, though hawkish expectations (31%) significantly outweigh dovish ones (7%), and uncertainty over the interest rate path remains a potential market disruptor.

The current survey reveals typical overheating characteristics. The net overweight allocation to global equities rose to 56%, marking 14 consecutive months of being overweight; cash allocation at 3.5% is the lowest since February 2026 and the sixth lowest since records began in 1998. The Bank of America FMS Cash Rule triggers a sell signal when cash allocation drops to 4.0% or below, and this signal is currently active; the Bull & Bear Indicator reading rose to 9.3, also in the sell zone (triggered at above 8.0).

In terms of positioning, the most crowded trade is "long global semiconductors," with 53% of respondents holding this view, although down sharply from the historical high of 82% last month. The second most crowded trade is "short yen" (12%), followed by "long Magnificent 7" (11%). Bank of America's contrarian trade recommendations include: long bonds/short commodities, long consumer staples/short tech stocks, long UK equities/short US equities.

A noticeable change has emerged in the tail risk landscape. The "AI bubble" remains the top tail risk for the second consecutive month at 32%, but "disorderly rise in bond yields" jumped from third to second place at 27%, surpassing "second wave inflation" (25%).

Meanwhile, the health of corporate balance sheets has raised concerns. A net 19% of respondents believe that companies are excessively leveraged, the highest since March 2023 and a significant increase from 7% last month. When asked about the most likely market reaction should the Democrats sweep both chambers in the mid-term elections, 37% of respondents expect "bond yields to rise and stocks to fall," reflecting the market's high vigilance towards fiscal expansion and its impact on the bond market.

AI-related topics show a clear divide in this survey.

On one hand, the "AI bubble" remains the largest tail risk; "AI mega-scale computing capital expenditure" is for the second consecutive month seen as the most likely source of a systemic credit event (38%), followed by private credit (23%).

On the other hand, 71% of respondents do not believe any AI mega-cap firms will announce capex cuts by 2026, up from 61% last month; 58% believe AI will not have a broad labor market impact until after 2028; 31% even believe AI will not materially disrupt the labor market at all. This contradiction—worrying about a bubble but unwilling to reduce positions—echoes the current state of extremely crowded positioning.

On the macro level, optimism continues to rise. A record 56% of respondents expect the global economy to achieve a "no landing" scenario in the next 12 months, up from 54% last month and the mainstream consensus for two months in a row; those expecting "economic boom" (above trend growth, above trend inflation) rose to 43%, the highest since February 2022; the net proportion expecting double-digit corporate earnings growth in the next 12 months reached 37%, also the highest since August 2021.

At the same time, 49% of respondents expect "stagflation" (below-trend growth, above-trend inflation), up slightly from 47% last month. This seemingly contradictory combination—booming expectations alongside stagflation worries—reflects the inherent tension in the current macro narrative. Regarding oil price expectations, respondents raised their Brent crude target for end-2026 from $71/bbl to $76/bbl.

In terms of allocation, respondents increased holdings in technology, banking, and energy sectors in August, while reducing their positions in industrials and healthcare, and also covered short positions in both staples and discretionary consumption.

Regionally, net overweight in US equities rose to 27%, the highest since December 2024; emerging markets net overweight stood at 34%; UK equities were net underweighted by 33%, standing 1.5 standard deviations below historical levels. Net underweight in bonds widened further to 39%. Commodities net overweight reached 24%, 1.4 standard deviations above the long-term average. Notably, a net 16% of respondents think gold is undervalued, the highest since March 2023, highlighting potential hedging demand. Regarding the dollar, a net 39% believe the dollar is overvalued, up from 34% last month.

On political risk, 47% of respondents expect the outcome of the mid-term elections to be a "Democratic House, Republican Senate" split, while expectations for a Democratic sweep dropped from 27% to 23%. If the Democrats achieve a sweep, 37% expect bond yields to rise and stocks to fall, while only 9% expect the "boom" scenario of both bonds and stocks rising, reflecting investors' high alertness to fiscal expansion pressures on the bond market.