Fund managers require the 10-year Treasury yield to reach 5.9% before they will shift capital from stocks to bonds, according to a survey by Bank of America. The current 10-year yield stood at 5.22% on Tuesday, indicating a significant gap remains before investors view government debt as the preferred asset class.
The recent increase in bond yields is driven by high economic growth and an artificial intelligence boom, which has pushed real yields higher. Bonds have experienced a sharp decline since March 2022, when the Federal Reserve began raising interest rates. Because bond prices move inversely to yields, this period has been difficult for fixed-income holders. In contrast, stocks have dominated the market over the past four years, with Big Tech companies reaching record highs due to soaring capital expenditures on AI infrastructure.
Despite the strong performance of equities, several factors are prompting warnings of a potential pullback. These include the rapid rise in bond yields this year, high oil prices, concerns about AI risks, and weak market breadth. The BofA survey highlights that 32% of responding fund managers identify a "disorderly rise in bond yields" as the biggest tail risk to markets. A further 23% cite the threat of an AI bubble as their primary concern.
Opinions are divided on the future of the AI sector. When asked whether an AI bubble will occur in 2027, 45% of surveyed fund managers answered yes, while 42% said no. The survey results suggest that while equity markets remain strong, a significant portion of institutional investors are monitoring yield levels closely for a signal to change their asset allocation.