A Bank of America fund manager survey revealed that "disorderly rise in bond yields" has replaced "AI bubble" as the biggest market concern!

Global fund managers' risk appetite is quietly shifting. Bank of America's September Global Fund Managers Survey (FMS) shows that "disorderly rise in bond yields" has surpassed "AI bubble" for the first time, becoming the biggest tail risk in the market, reflecting investors' deep anxiety about the interest rate outlook.

The survey, conducted from September 4th to 10th, involved 190 fund managers with a combined total of $512 billion in assets under management. The survey revealed that 33% of respondents listed "disorderly rise in bond yields" as the biggest tail risk, up from 27% in August; while "AI bubble," which topped the list last month, dropped from 32% to 28%, falling to second place.

At the same time, both Bank of America's FMS cash rules and bull/bear indicator issued "sell" signals—the cash ratio rose from 3.5% to 3.9%, and the bull/bear indicator reading reached 9.5, both in the sell range.

The overall cooling of investor sentiment corroborates the aforementioned shift in risk appetite. Bank of America's broadest FMS sentiment composite index fell to 7.0 from 8.0 in August, its lowest level in nearly three months. The August survey had previously been the third most optimistic monthly survey since 2022. In terms of asset allocation, fund managers increased their holdings in healthcare, industrials, and banks, while simultaneously reducing their holdings in REITs and consumer staples, with the latter reaching its highest underweight level since January 2004.

Bond risk has jumped to the top spot, and interest rate expectations have shifted dramatically.

Concerns in the bond market intensified across the board in this month's survey. A net 36% of FMS investors expect short-term interest rates to rise, the highest level since September 2022; a net 25% believe that current global monetary policy is too loose, also the highest since September 2022.

Expectations for Federal Reserve policy have become significantly divergent. A survey shows that 52% of respondents believe the Fed will not raise interest rates before the November midterm elections, a significant drop from 72% in August; meanwhile, 41% of respondents expect the Fed to raise rates before the midterm elections, a significant increase from 22% in August.

The market reaction to the U.S. Treasury's bond repurchase program was similarly cautious. Regarding the Treasury's decision to expand its bond repurchase program from September 9 to November 4, 46% of respondents believed it would not affect U.S. Treasury yields, 29% believed it would lead to higher yields, and only 16% believed it would lead to lower yields.

Regarding bond allocation, FMS investors are currently net underweight in bonds by 48%, the largest underweighting since May 2022, and have been underweight for 17 consecutive months. The survey also shows that 27% of respondents believe that only an attractive level, such as 6% for the 30-year US Treasury yield, would prompt asset allocators to overweight government bonds.

AI capital expenditures continue to receive strong support, but concerns about systemic risks are rising.

Despite the "AI bubble" receding from the top of the list of biggest tail risks, fund managers' confidence in AI capital expenditures remains strong. 79% of respondents do not believe that AI hyperscale cloud computing companies will announce cuts in capital expenditures by 2026, a further increase from 71% in August; only 14% expect AI capital expenditure cuts.

However, the proportion of respondents who considered AI-driven mega-capital expenditures as the most likely source of systemic credit events rose to 42%, up from 38% in August, with government debt ranking second at 25%. Meanwhile, a net 33% of respondents believed that businesses were over-investing, matching the historical high reached in February 2026.

In terms of the most crowded trades, "going long on global semiconductors" remained the top choice for the second consecutive year with 53%, followed by "going short on US Treasuries" at 18%, and "going long on Magnificent 7" at 7%.

A survey of Asian fund managers reveals greater caution regarding the monetization potential of AI. Bank of America Asia FMS data shows that 80% of respondents said they need to see clearer evidence of AI monetization before increasing their allocation to AI-related stocks. 55% of Asian respondents believe that the positive impact of AI on the stock market has been "largely priced in" or "overpriced in," a significant increase from 37% in August.

Macroeconomic expectations remain stable, and the prevailing view is that the market will not experience a "landing" scenario.

Despite a slight decrease in risk appetite, fund managers remain generally optimistic about the macroeconomic fundamentals. 55% of respondents expect a "no-landing" global economy, slightly lower than the record high of 56% reached in August; 38% expect a "soft landing," while only 2% expect a "hard landing," the latter matching the record low of July 2026.

A net 8% of respondents expect global economic growth to accelerate over the next 12 months, down from 14% last month. Regarding earnings expectations, the proportion of investors expecting double-digit EPS growth over the next 12 months is the highest since August 2021.

Inflation expectations have seen a slight reversal, with a net 4% of respondents expecting global CPI to fall, compared to a net 3% in August expecting inflation to rise. 50% of respondents described the global economy over the next 12 months as "stagflation" (below trend growth, above trend inflation), while 38% expected "boom" (above trend growth, above trend inflation).

In Asia, Bank of America Asia FMS data shows that a net 55% of respondents expect improved corporate earnings in the Asia-Pacific region (excluding Japan), up from 45% in August. Investors' expected return on Asia-Pacific (excluding Japan) equities over the next 12 months is 6.3%, ranking in the 89th percentile historically; the expected return on Japanese equities has risen to 6.4%, ranking in the 94th percentile historically.

The risk of a midterm election is rising, and the probability of a Democratic sweep is increasing.

Political risk was another focus of this month's survey. 44% of respondents expected the midterm elections to result in a split between Democrats controlling the House of Representatives and Republicans controlling the Senate; the expected probability of a Democratic sweep (controlling both the House and Senate) rose from 23% in August to 31%.

If the Democrats sweep the board, 45% of respondents expect the market reaction to be "bond yields rise and stock market falls," 19% expect "bond yields fall and stock market rises," 13% expect "bond yields fall and stock market falls," and only 4% expect a "prosperous" scenario where both rise simultaneously.

Asset allocation: Increase holdings in financials and healthcare, reduce holdings in defensive sectors.

In terms of asset allocation, FMS investors' net overweighting of equities decreased to 49% from 56% last month, but is still 0.9 standard deviations above the long-term average. Net overweighting of commodities decreased from 24% to 19%, while net underweighting of real estate widened from 7% to 21%, the largest underweighting since September 2025.

In terms of sector rotation, funds flowed into financials (banks and insurance), healthcare, and industrials in September, while flowing out of REITs, consumer staples, and telecommunications. Net overweighting in banks rose to 34%, the highest since November 2025; net underweighting in consumer staples widened to 33%, the largest underweighting since January 2004.

In terms of regional allocation, US equities are net overweighted by 25%, emerging market equities by 38%, while Eurozone equities have shifted from a net overweight of 6% last month to a net underweight of 5%. UK equities are net underweighted by 35%, making it one of the regions with the largest absolute underweight.

Bank of America's contrarian trading recommendations include: going long on UK stocks/going short on US stocks, going long on consumer staples/going short on banks, and going long on small-cap stocks/going short on large-cap stocks.

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