Bear Flattening Getting Crowded

QI TAKEAWAY —  Changing narratives pit inflation against deflation (i.e., China). The former is squarely on investors’ radar screens, while the latter has faded. This pivot by fund managers reinforces the bear flattener trade.

  1. The top four concerns in August & September’s BofA’s Global Fund Manager survey were Inflation, Tantrum, Bubble and COVID-19 – none of which got more than 25% of responses; clarity on risks emerged in October, with Inflation the clear winner at 48% and China at 23%
  2. At 31%, investors view inflation and the Fed as the primary drivers of 2022 asset markets; with China at a distant fifth place with 8% of responses, deflation is an underpriced risk reflected in the yuan’s appreciation to 6.3930, which defies the deflation narrative
  3. Per BofA, the net percent of investors expecting a steeper yield curve fell to 23% in October, the lowest since June 2019 and well below September’s 48%; though deflation is not the consensus view, opportunities exist should China tail risk probability grow in importance