A recent Bank of America (NYSE:BAC) (BofA) survey reveals that 55% of investors expect the Federal Reserve to cut interest rates twice before the end of the year.
This sentiment comes in the wake of softer-than-expected Consumer Price Index (CPI) prints in May and June, which have led to increased optimism about inflation being under control.
The bank's Global Convertibles Investor Survey, conducted by BofA, highlights a significant shift in investor expectations and portfolio strategies.
"CB investors have pulled-forward their expectations for rate cuts, and they overwhelmingly think that interest rates will head south over the next 6 months," the BofA note states.
This has resulted in a strategic repositioning towards convertible bonds (CBs) from small- and mid-cap issuers, which are seen as beneficiaries of lower interest rates.
Investors are not only reallocating to CBs from smaller companies but also maintaining large allocations in higher-growth and longer-duration sectors such as technology and consumer discretionary.
The survey indicates that "average cash balances in CB manager portfolios have dropped to record lows," reflecting a strong risk-on mentality.
Participation in the survey was robust, with 31 respondents from institutional accounts and hedge funds across the US, Europe, Asia, and other regions. BofA said the key takeaway is the widespread belief that the Fed will cut rates, a view more optimistic than that of the bank's own economists.
More than 80% of respondents, a record high, are said to anticipate a decline in interest rates over the next six months.
"CB investors are positioning for stock rotation amid hopes for lower rates," BofA notes, underlining the prevalent expectation of rate cuts driving this strategic shift. This has led to increased investment in sectors poised to benefit from a lower rate environment, further reinforcing the positive outlook among CB managers.