Global fund managers are closely monitoring the U.S. 10-year Treasury yield, with many identifying a 6 percent yield as the critical threshold that could prompt a widespread shift from equities to bonds. According to a recent survey by Bank of America, this level represents a key inflection point where investors might pivot toward the "risk-free" returns of government debt, potentially impacting stock market dynamics.

The survey, conducted from October 2 to October 8 among 185 global fund managers managing $453 billion in assets, reveals that while some rotation from stocks to bonds is already underway, much of the equity rally this year has been driven by strong earnings in major artificial intelligence (AI) stocks. The S&P 500 index has climbed approximately 14 percent year-to-date despite rising oil prices and recent Federal Reserve interest rate hikes. However, the market’s advance has shown signs of slowing, with the S&P 500 mostly trading sideways over recent weeks even as it reached a record high of 7,844.52 points last week.

The 10-year Treasury yield has surged from around 4.7 percent two months ago to a 24-year peak of 5.36 percent in mid-October. Bank of America’s chief investment strategist Michael Hartnett notes that while 19 percent of surveyed managers believe yields are already high enough to justify moving out of stocks, a larger group—37 percent—said they are waiting for yields to reach 6 percent before making that shift. The 6 percent level is thus seen as a critical psychological and investment benchmark.

Sentiment remains cautiously bullish heading into the upcoming Federal Reserve meeting scheduled for October 27-28 and the U.S. midterm elections on November 3. Fund managers hold relatively low cash levels, averaging 3.9 percent, suggesting continued commitment to equities. Nearly half (47 percent) of respondents foresee above-trend economic growth and inflation in what Bank of America terms a “boom” scenario, the highest proportion since February 2022. Pessimism about further increases in long-term interest rates has also diminished, with only 1 percent expecting rates to rise substantially, down sharply from 15 percent in September.

Despite this optimism, other measures indicate some cooling in investor enthusiasm. Bank of America’s composite sentiment indicator, which factors in cash levels, equity allocation, and growth expectations, declined from 7.0 in September to 6.4 in October. Hartnett highlights a slowdown in growth forecasts alongside moderating U.S. equity performance.

Among the biggest risks cited by the respondents, a disorderly surge in bond yields ranks highest, with 31 percent flagging it as the top tail risk. This concern eclipses other potential threats such as an AI bubble (23 percent), a resurgence of inflation (20 percent), or a major credit event among hyperscalers (11 percent). Views on the AI sector remain divided: 45 percent of investors expect an AI bubble could form by 2027, while 42 percent disagree. Nevertheless, most do not anticipate major technology firms will reduce AI spending in the near term, although the share expecting a cut in the next six months has risen to 30 percent, more than doubling since last month.

For now, Wall Street’s largest investors remain heavily invested, keeping cash levels below Bank of America’s 4 percent threshold that would signal selling pressure in equities. Still, with the 10-year Treasury yield approaching 5.36 percent and potentially nearing the 6 percent level within months if current trends continue, market watchers note that the balance between investor confidence and potential capitulation could be precariously narrow.