Bank of America generally favors equities over bonds and moved to “underweight” investment-grade corporate notes in their total-return asset allocation recommendations in February, Mikkelsen said in a telephone interview. Goldman Sachs favors stocks over both a three- and 12-month period, is bearish on government bonds and forecasts “close to zero” returns for corporate credit, its strategists said in a May 21 report.
“You can’t run away from bonds, but equities are cheaper,” said Andrew Feltus, a money manager who helps oversee $36.7 billion in U.S. fixed-income assets at Pioneer Investment Management Inc. in Boston.
Corporate bonds globally have gained an average 10.1% annually since 2008, when the Fed embarked on an unprecedented program of buying bonds and holding its interest rate target near zero to ignite economic growth. That compares with annual gains of 16.7% for the S&P 500.
Companies have since sold $5.7 trillion of notes as relative yields on dollar-denominated debt plunged 5.7 percentage points to 2.31 percentage points through June 11, Bank of America Merrill Lynch index and Bloomberg data show. JPMorgan, Bank of America, Goldman Sachs and Morgan Stanley are among the six most-active underwriters of the debt.
Speculation has mounted since Bernanke’s comments last month that the Fed will soon start scaling back its stimulus efforts.
San Francisco Fed President John Williams said last week that a “modest adjustment downward” in the asset purchases is possible as “early as this summer.”
“We do not see these warnings as simply loose talk that costs lives, but more a kind of fire drill for risk managers on what the end of easy money could do to financial markets,” JPMorgan credit strategists said June 7 of the talk by Fed officials. “In our model portfolios, we added to our overweight of equities, and have greatly reduced the credit overweight versus safe debt to a small position, focused on shorter- duration credit.”
The global economy is “in the early stages of the recovery of the equity culture and perhaps the end of a 30-year growing love affair” with bonds, said Jim O’Neill, former chairman of Goldman Sachs Asset Management in a June 11 interview on Bloomberg Television.
Investors yanked a record $4.8 billion from U.S. high-yield bond funds last week and pulled $850 million from investment- grade funds, the first weekly redemption since December, according to a Bank of America report on June 6.
U.S. private pension funds and insurance companies pushed their allocation to equities to 45% in the first quarter, the highest proportion since 2007, as they bought $13 billion of stocks while selling $10 billion of bonds, JPMorgan data show.