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What Bond Traders Are Most Worried About Right Now

The latest monthly survey of credit investors from Bank of America, released overnight, shows the same familiar paradox we have seen ever since the start of the year: most survey respondents are allegedly scared worried about geopolitics and a concerned that the market is a bubble, and yet at the same time, most are allocating even more assets into what may be the biggest and riskiest credit bubble of them all: junk debt.

As BofA's Hans Mikkelsen writes, while high grade investors reduced their positioning somewhat in June "although remaining significantly overweight", high yield investors in contrast shifted from a small underweight to a small overweight.

He addes that "whereas no HG investors reported being "underweight" in our May survey this time 8% of investors gave such response, although still no HG investors appear "significantly underweight". Also this time 2% of HG investors were "significantly overweight", down from 6% in our prior survey (Figure 7). On the HY side we saw 3% of investors being "significantly overweight" and no "significantly underweight" (Figure 8).

Enough about positioning: what about the most important question: what events are most concerning to what is allegedly the smartest group of investors? Here is the answer:

While geopolitical risk remains (by far) credit investors' #1 concern not surprisingly - given their recent decline - oil prices moved into second place and - with the rally in financial markets - asset bubbles jumped into third position (Figure 1). Otherwise the general theme in how investors perceive coming challenges is that downside risks - such as slow recovery and recession/deflation - have increased, as hard economic data disappointed. On the other hand credit investors have become less concerned about "China", "trade war", "inflation" and "currency war". Finally, with market favorable developments in France and Italy it makes sense that the number of investors expecting the European sovereign crisis to improve now outnumber their more pessimistic counterparts by a factor of five.

On the other hand, if more than half of the credit investing community was indeed worried about geopolitical risk, and 40% concerned about asset bubbles, we doubt bond spreads would be at the tightest they have ever been on record, which suggests that this poll, like so many others like it, merely afford investors the oppotunity to say what they think everyone else will say, and - more to the point - what they would say if there wasn't an ubiquitous central bank in the form of $15 trillion in liquidity put behind every transaction.