Global investors cut government debt from portfolios in March, slashing holdings of U.S. bonds to a six-month low as hopes for more Federal Reserve bond-buying faded with a mounting U.S. economic recovery, Reuters latest asset allocation polls showed on Thursday.
The surveys of 55 leading investment houses in the United States, continental Europe, Britain and Japan showed a typical balanced portfolio held 36.9 percent of its assets in North American bonds, compared with 39.7 percent last month.
Aggregate holdings of government securities in bond portfolios fell back to December levels even as eurozone bond and Asia bonds holdings held broadly stable.
The retreat from core government debt accelerated in March as this year's rally in equities and risk assets continued amid a gathering U.S. economic recovery and as easing eurozone risks sapped demand for safe-haven securities. Ten-year U.S. Treasury bond yields climbed as much as 35 basis points in the first two weeks of March to a high of 2.375 percent before easing back.
The brighter global outlook also prompted speculation that the world's major central banks would at least put a hold on their emergency bond-buying and money-printing policies, further undermining demand for core U.S. and German government debt.
Although there were differing pictures from regional managers, investors worldwide increased aggregate equity holdings for the third month in a row to their highest in 12 months. But in a sign of emerging caution amid the optimism, they upped cash levels again too.
Mike Turner, head of global strategy and asset allocation at Aberdeen Asset Management, said his funds are investing cautiously — foraging for returns but with half an eye on a very uncertain future.
"We believe there is a scope for market disappointment in terms of political risk in Europe and economic momentum being affected by high oil prices," Turner said.
"For now the global liquidity is still supportive of risky assets, but the "ultra easy" monetary policy in developed markets might be coming to an end."
World stocks, as measured by MSCI, are up about 12 percent since the start of the year, after a volatile 2011 that saw losses of more than 9 percent. But gains of only 1 percent in March pale next to more than 5 percent each in January and February.
TENTATIVE RETURN TO EUROPE?
Within the regional shifts, there were positive signs for European markets as U.S. and Japanese fund managers flagged a return to the eurozone's battered stocks and bonds.
The European Central Bank's two rounds of cheap, long-term loans to its banks in December and February has helped defuse the bloc's banking and sovereign debt crisis and prompted some reappraisal of the region's markets.
U.S. money managers showed their strongest demand in more than a year for eurozone debt in March, a sign that concerns about the European crisis may be ebbing.
A Reuters poll of 14 U.S.-based fund management companies released on Thursday revealed the firms allocated 20.6 percent of global bond investments to the eurozone, a 15-month high.
Those same firms, which were surveyed between March 20 and 28, decreased their U.S. and Canadian bond holdings to an average of 57.4 percent, the smallest percentage in 15 months.
"The modest preference to sovereign issuances in our fixed-income portfolio is partially driven by the likelihood that as risk mitigates in Europe, despite continuing structural concerns, we anticipate some narrowing of spreads between the periphery and core nations," said Douglas Gordon, senior investment strategist for North America at Russell Investments.
Japanese investors also cut global bond holdings but upped European equity weightings.
Within the equity portfolio, fund managers raised their weighting on the eurozone to the highest level since the debt crisis began, to 15.7 percent from 13.0 percent in February. It was the highest reading since August 2008.
They cut their Japanese stock weighting to 33.3 percent from a record high of 35.1 percent hit last month, though it has remained well above the 30 mark for three months in a row for the first time in eight years.
European fund managers pared back equity holdings in March for the first time in seven months as this year's rally in risk assets cooled, while also shifting into corporate debt from government bonds.
British managers were most bullish on equities. The average exposure to equities in balanced portfolios according to a survey of 14 British investment managers jumped 2.8 percentage points to 54.9 percent this month, the highest allocation to the asset class since February 2011.
Investment in bonds slipped to 22.4 percent from 23.8 percent in March, its lowest level in 11 months, while the proportion of assets held in cash has now more than halved from its December peak, dropping to 5 percent as investors put more of their idle money to work in a quest for yield.
But there were notes of caution there too.
"Market rallies make fund managers nervous, forcing them to act, normally by buying those assets that have risen strongly already to try limit any further damage to their reputations," warned Thomas Beckit, CIO of PSigma Investment Management.
"Such activity may well be partly responsible for the length of the recent upswing in the market," he said.
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