A sharp rise in bond yields is a bigger concern for fund managers than COVID-19 – and most believe crypto is in a bubble, but stocks aren’t even close, BofA said

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  • A so-called ‘taper-tantrum’ is now worrying investors more than Covid-19 and inflation, according to Bank of America.
  • Almost 75% of people believe crypto is in a bubble, while less than 10% believe equities are, BofA said.
  • Expectations for a V-shaped recovery are at 50%, up from 10%, BofA said.
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Fund managers are now more worried about a so-called “taper tantrum” in the bond market than Covid-19 or inflation, according to a Bank of America global survey of fund managers. Wider macroeconomic and market-specific optimism however remained high.

Government bond yields have risen sharply over the past few months, as evidence of recovery has fed optimism over the economic outlook, prompting some to consider the possibility of the Federal Reserve withdrawing monetary policy support more quickly than expected.

The result is a so-called “taper-tantrum”, where concern over a prompt tapering in Fed support for the economy sparks an aggressive sell-off in government bonds, thereby pushing up yields.

According to Bank of America’s monthly global fund manager survey, a taper tantrum is the biggest tail risk as far as investors are concerned, trumping both Covid-19 and inflation.

“A year ago, COVID-19 was named a global pandemic on March 11th. Now in April 2021, a mere 15% cite COVID-19 risk as the biggest tail risk, lower than even “higher taxes” at 15%. Taper Tantrum is now first at 32%, followed by inflation at 27%,” the bank said.

The yield on the benchmark 10-year Treasury note is currently around 1.6%, up from around 0.75% just six months ago. The yield hit its highest since last January in late March, trading around 1.77%.

Between February 2020 and March this year, the pandemic ranked as the main worry, but the long-term impact of economic policies related to Covid-19 have now taken over. Covid-19 itself is now the fourth biggest risk factor. “Risks (are) now associated with boom, not recession,” BofA said.

One of the side-effects of the Fed’s policy of pumping as much extra cash into the financial system as possible has been to send asset prices for stocks, cryptocurrencies and some commodities to multi-year, and even, record highs.

The monthly survey found 74% of survey respondents believe cryptocurrencies are in a bubble. Bitcoin hit a record high above $63,000 on Tuesday, having more than doubled in value since the start of the year, while other digital assets, such as non-fungible tokens, or NFTs, have surged in price and popularity in recent months.

US benchmark stock indices have reached record highs this month. The S&P 500 has gained 10% so far in 2021 and around 45% in the last 12 months. But only a minority of respondents believe equities are in a bubble. Just 7% said this was the case.

Instead, 66% of investors think stocks are in a late-stage bull market, boosted by economic and monetary stimulus, including President Joe Biden’s $1.9 trillion infrastructure spending plan.

The wider macroeconomic picture appears to be positive for investors, as the “past year expectations for “V-shaped” recovery have picked up to 50% from 10% previously, the survey showed.

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Wall Street and Main Street are both scared of inflation, and how the US economic recovery will hit their wallets

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Banks large and small, both national and regional, are seeing increased interest in digital and contactless services, as the coronavirus pandemic has forced consumers to rethink the kind of banking interactions they’re comfortable having.

  • Americans of varying backgrounds are growing increasingly concerned of rampant inflation.
  • Google searches for “inflation” reached a record high this week, according to Deutsche Bank.
  • Surveyed fund managers now see high inflation as riskier to markets than the pandemic, BofA found.
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Forget the pandemic. Inflation is the new issue haunting Americans, on Wall Street and Main Street alike.

Celebrations over vaccine approvals and falling COVID-19 case counts are giving way to concerns over just how quickly the economy will recover – and what that means for prices.

New stimulus signed earlier this month promises to send hundreds of billions of dollars directly to Americans and supercharge consumer spending. And shortly afterward, the central bank underscored that it will support a strong recovery this year, as the Federal Reserve reiterated that it plans to maintain ultra-easy financing conditions at least through next year.

The potent combination of monetary and fiscal support has many fearing a sharp jump in inflation. The eventual reopening of the US economy is expected to revive Americans’ pre-pandemic spending habits. Yet an overshoot of expected inflation could spark a cycle of increasingly strong price growth that leaves consumers with diminished buying power.

Worries of such an outcome are shared among both the investor class and the general public. Google searches for “inflation” surged to their highest level since at least 2008 last week, according to research by Deutsche Bank Managing Director Jim Reid. Dovish investors might highlight that similar spikes emerged after the financial crisis, but hawks can point to the unprecedented scale of pandemic-era relief for why today’s situation stands out, Reid said in a note to clients.

“Whether or not inflation ever materializes there is a rational reason why this time might be different. That’s reflected in the increased attention on inflation,” Reid added.

The theme that this time might be different was echoed by a UBS team led by Arend Kapteyn, who wrote in a March note that “pandemic price movements have been unusually large … and are historically difficult to model/predict.”

More recently, a survey from data firm CivicScience shows 42% of adults being “very concerned” about inflation, according to Axios. That compares to just 17% saying they’re “not at all concerned.”

Inflation worries investors more than Covid

Also, institutional investors are shifting their focus from the pandemic to the risk of rampant inflation. Higher-than-expected inflation is now the biggest tail risk among fund managers, according to a recent survey conducted by Bank of America, higher even than the pandemic itself. Snags to vaccine distribution fell from the top of the list to third place, while a potential bond-market tantrum was the second most-feared risk.

To be sure, younger Americans seem less perturbed. The gap in inflation expectations between the baby boomer generation and millennials is the widest its ever been, a team of Deutsche Bank economists led by Matthew Luzzetti wrote earlier this month.

The disparity is likely a product of vastly different circumstances, according to the team. Older investors lived through the “Great Inflation,” a period from the mid-1960s to the early 1980s during which inflation surged and forced interest rates to worrying highs.

Younger Americans have only known a quarter-century of inflation landing below the Federal Reserve’s 2% target, and millennial investors could have a massive influence on whether inflation expectations and real price growth trend higher as the economy reopens, the bank’s economists said.

“With memories of the Great Inflation possibly already lifting inflation expectations for older age groups today, a more material drift higher in expectations likely would require a lift from the younger age groups,” they added.

CivicScience’s newer data suggests that gap is quickly closing. More than half of respondents aged 18 to 24 said they’re “very concerned” about inflation, more than any other age group surveyed. By comparison, just 37% of Americans aged 55 and older said they’re “very concerned.”

Respondents aged 35 to 54 were still the most worried overall, with 48% saying they’re “very concerned” and 36% saying they’re “somewhat concerned,” according to CivicScience.

Kapteyn’s note for UBS highlighted that the conversation around inflation closely resembles the one following the Great Recession: “A decade ago, following the global financial crisis, we were having very similar conversations with clients as we are now.”

At that time, fears of a quick recovery fueling an inflation bubble were similarly strong, “but instead we wound up in secular stagnation,” the bank wrote, referencing the phrase made famous by prominent economist Larry Summers to describe prolonged low growth and low inflation.

This suggests that Americans’ worries about future price growth – including warnings from Summers himself – could starve the US economy of healthy growth and rehash the last decade’s plodding recovery.

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