Global fund manager sentiment has reached multi-year highs, yet alarms are quietly sounding over the risk of disorderly rises in bond yields.

The August Global Fund Manager Survey from BofA Securities shows investor sentiment at its most optimistic for the third time since 2022, with global equity allocations climbing to their highest since November 2021 and cash levels dropping to 3.5%, the sixth-lowest reading on record. Meanwhile, risk signals are sharpening, with "disorderly bond yield rises" jumping to the second-largest tail risk at 27%, trailing only the "AI bubble" (32%) which has held the top spot for two consecutive months.

Conducted between August 7 and 13 with 203 participants managing a combined $581 billion in assets, the survey triggered simultaneous "sell" signals from BofA's two contrarian indicators, the FMS Cash Rule and the Bull-Bear indicator, underscoring how crowded positioning has become near historical extremes. Strategists suggest investors consider retreating or rotating within risk assets rather than adding exposure.

On policy expectations, 72% of respondents believe the Federal Reserve will not raise rates before the midterm elections, while ahead of the Jackson Hole symposium scheduled for August 27-29, 53% expect Fed Chair Kevin Warsh to maintain a neutral stance, though hawkish expectations (31%) significantly outweigh dovish ones (7%), leaving rate path uncertainty as a potential market disruptor.

Overheated Optimism Creates Crowding Risks

The survey displays classic signs of overheating. Global equity net overweight positions rose to 56%, marking the 14th consecutive month of overweight, while cash at 3.5% is the lowest since February 2026 and the sixth-lowest since records began in 1998. The FMS Cash Rule, which triggers a sell signal when cash falls to 4.0% or below, remains active, and the Bull-Bear indicator at 9.3 also sits in sell territory, above the 8.0 threshold.

In terms of positioning, the most crowded trade is "long global semiconductors," cited by 53% of respondents, though down sharply from last month's historic peak of 82%. The second-most crowded trade is "short yen" (12%), followed by "long Magnificent 7" (11%). Contrarian recommendations from BofA include going long bonds versus short commodities, long consumer staples versus short tech, and long UK stocks versus short US stocks.

Bond Market Risk Surges to Join AI Bubble as Core Threat

The tail risk landscape shows notable shifts. "AI bubble" remains the top risk for a second straight month at 32%, but "disorderly bond yield rises" climbed from third to second place at 27%, surpassing "second wave of inflation" (25%).

Concerns over corporate balance sheet health are also rising. A net 19% of respondents believe corporate balance sheets are over-leveraged, the highest since March 2023, up sharply from 7% last month. When asked about the most likely market reaction if Democrats sweep both chambers in the midterms, 37% chose "higher bond yields, lower equities," reflecting heightened vigilance over fiscal expansion and its impact on debt markets.

AI: Both the Greatest Threat and the Strongest Conviction

AI-related topics reveal a stark divide in this survey.

On one hand, "AI bubble" retains its position as the biggest tail risk, and "AI hyperscaler capital expenditure" is seen for a second consecutive month as the most likely source of a systemic credit event (38%), followed by private credit (23%).

On the other hand, 71% of respondents do not expect any AI hyperscaler to announce capex cuts by 2026, up from 61% last month. Additionally, 58% believe broad AI disruption to labor markets will not occur before 2028, and 31% think AI will cause no material labor market impact at all. This contradictory mindset, worrying about a bubble while reluctant to reduce positions, echoes the extreme crowding in overall allocations.

Macro Expectations: No-Landing Narrative Hits Record High

At the macro level, optimism continues to build. A record 56% of respondents expect a "no landing" for the global economy over the next 12 months, up from 54% last month and the consensus view for two consecutive months. Expectations of "economic boom" (above-trend growth with above-trend inflation) rose to 43%, the highest since February 2022, while a net 37% expect double-digit corporate earnings growth over the next year, the strongest since August 2021.

At the same time, 49% expect "stagflation" (below-trend growth with above-trend inflation), up slightly from 47%. This seemingly contradictory pairing of boom expectations and stagflation worries highlights the tension within current macro narratives. On oil, respondents raised their end-2026 Brent crude price target to $76 per barrel from $71.

Asset Allocation: Favoring US Equities and Commodities, Trimming Bonds

In August, respondents increased allocations to technology, banks, and energy while reducing industrials and healthcare, and covering shorts in both consumer staples and consumer discretionary.

Regionally, US equity net overweight rose to 27%, the highest since December 2024, while emerging markets saw a net overweight of 34%. UK equities remained deeply underweight at a net -33%, sitting 1.5 standard deviations below historical norms. Bond net underweight widened to 39%, while commodities showed a net overweight of 24%, 1.4 standard deviations above the long-term average. Notably, a net 16% consider gold undervalued, the highest since March 2023, underscoring latent demand for safe-haven assets. On currencies, a net 39% view the US dollar as overvalued, up from 34% last month.

Midterms: Divided Congress Remains the Base Case

On political risk, 47% expect a split result with Democrats controlling the House and Republicans retaining the Senate, while expectations of a Democratic sweep fell to 23% from 27%. If Democrats were to sweep, 37% anticipate higher bond yields and lower equities, with only 9% expecting a "boom" scenario of both stocks and bonds rising, reflecting investor wariness over potential fiscal expansion pressuring debt markets.