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Institutional investors shift towards bonds amid market volatility
Institutional investors moderated their risk appetite in April, leading to a surge in demand for the US dollar and a retreat from riskier assets, according to the latest State Street Institutional Investor Indicators report released today.
Institutional investors shift towards bonds amid market volatility
Institutional investors moderated their risk appetite in April, leading to a surge in demand for the US dollar and a retreat from riskier assets, according to the latest State Street Institutional Investor Indicators report released today.
The State Street Risk Appetite Index fell to 0.0 from 0.09, revealing a modest retreat in risk bias across the month of April back towards neutral.
"Institutional investor risk appetite moderated in April led by a surge in demand for the US dollar, with inflows close to a five-year high over the month," said Michael Metcalfe, Head of Macro Strategy at State Street Global Markets. "The flip side of this is that institutional investor flows into the Japanese yen (JPY) and emerging markets currencies weakened."
The report noted that even before the JPY volatility at the end of April, long-term investor holdings of the JPY were already close to neutral.
Equity risk appetite was mixed, with weaker demand for high beta stocks, including tech, offset by firmer demand for emerging markets, including China.
While investors returned to fixed income as a whole in April, demand was concentrated in Treasuries, with little appetite for riskier emerging market debt or high-yielding corporate credit.
The State Street Holdings Indicators showed that long-term investor allocations to equities and cash fell by 0.2 percentage points each to 53.3% and 18.7% respectively, with cash holdings now back to their long-run average.
Fixed income holdings were the prime beneficiary this month, with allocations rising 0.4 percentage points to 27.9%, the biggest monthly rise in fixed income allocations since March 2023.
"April was a frightful month for bond and equity market returns, but the reaction of institutional investors was telling," Metcalfe added. "Rather than hide out in cash, they increased their allocation to fixed income by the most in more than a year."
He noted that this was a prescient move given the high, not higher, for longer message on rates from the Fed at the beginning of May and perhaps the beginning of investors re-assessing their still significant underweight in bonds.
However, Metcalfe cautioned that with long-term investor allocations to cash now falling back to a long-run average, the bar for good news to pull more money into equities has been raised as investors would likely need to fund this with an 'underweight' in cash.
"In contrast, if US interest rates really are going to be high and stable for now, investors may begin to re-assess their significant underweight in fixed income and look to have begun doing this in April," he said.
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