Investors positioned for further risk rally

Investors are positioned for a continuation of the recent risk rally. Latest BofA Merrill Lynch Global Research report found a reduction in duration exposure in major markets, particularly in the US and in Euroland. Investors are similarly positioned in the currency market, reducing exposure to USD while increasing that in EUR and EM currencies. However, with the exception of Japan, investors’ views are not as bearish as their positions indicate. Investors’ assessment of their own risk levels (65% average) also suggests that there is more room for further risk rally. Much more constructive on periphery

Investors have become more constructive on the periphery, the report says. Over 50% of respondents are now either neutral or bullish on peripheral bonds, compared to only 40% last month . This improvement in sentiment is consistent with the steepening in the Spanish and Italian bond curves observed since the December 3y LTRO. Such an improvement is also notable in investors’ view on the end-game scenario for the Eurozone. A majority of them (53%) now expect a muddle-through and the exit of at a Eurozone member is now seen as less likely (Table 6).

But struggling to form a view on US growth

There remains no consensus on US growth. Over a quarter of the investors believe that confidence can continue to grow, which is understandable following the recent string of positive surprises in US data. However, a similar number of investors remain concerned that the housing market is yet to bottom and believe that the recovery could be tentative . This could also explain why North American investors are neutral in duration in their domestic market.