Heavyweights such as Amundi, Vanguard and BlackRock turned bullish on bonds in recent weeks, on expectations that inflation has peaked and that a potential recession next year could push the Federal Reserve to end its most aggressive rate hiking cycle in decades. Many investors have followed suit. December’s BofA Global Research survey showed fund managers were the most overweight bonds versus stocks in nearly 14 years.
“The market seemed to have been getting ahead of itself expecting a pivot to occur from the Fed,” said Michael Reynolds, vice president of investment strategy at Glenmede. “It is coming to terms with the fact that the Fed is going to have to be tighter for longer, until they’re really sure that they’ve got inflation back under control.”
Several global and domestic developments are complicating the case for lower yields. China’s rollback of stringent COVID-19 policies may support global growth and mitigate a widely expected recession. It also threatens to push inflation higher. Investors are getting set for a rush of data next week, including minutes from the Fed’s latest meeting on Wednesday and the U.S. employment report for December on Friday.