GLOBAL – Fund managers have dramatically changed their interest rate views over the past month, leading to a sharp move underweight in bonds, according to the latest fund manager survey by Merrill Lynch.

Sentiment that the interest rate cycle has troughed in the UK and the US has led to a dramatic sell-off in bonds over the past few weeks, and fund managers still expect bond yields to rise further.

More managers now expect the next rate move by the Federal Reserve to be up rather than down, and the view has precipitated one of the most widespread underweightings of bond recorded by the survey, says Merrill Lynch. Fifty-nine percent of those surveyed said they were now underweight in bonds.

The Federal Open Market Committee was meeting today to set US interest rates.

Surprisingly perhaps, economic growth predictions still veer towards cautious. Eighty percent said they were expecting the global economy to become “a little stronger” over the next 12 months, and 50% of managers said they would prefer companies to be improving their balance sheets by repaying debt and topping up company pension plans, rather than increasing capital spending.

Global equities are regarded by more than half of managers are being fairly valued. Asset allocators are recommending a 53% weighting in equities in a cash, bond and equity fund, and there has been a marginal shift in favour of euro-zone equities. In terms of sectors, 60% of those surveyed regarded the tech sector as being the most overvalued in the world. Energy and insurance stocks are considered to be the most undervalued, and it is these two sectors that have the most pricing power.

Merrill Lynch’s monthly survey polled 276 fund managers from July 31 to August 7.