European fund managers cut bond holdings in favour of stocks in May and maintain a negative stance on bonds for the near term in expectation of higher global interest rates, a Reuters poll showed on Friday.

Responses from 12 fund manager firms in the monthly poll showed they remain underweight for every major bond market category for the next few months apart from corporate debt.

Investors are trimming bonds against a backdrop of concerns about inflation, signs of improving U.S. growth and high oil prices, analysts said.

"People have started to be afraid that inflation might have been let out of the bag. We have been worrying about higher interest rates for some time," Michala Marcussen, associate director of strategy and economic research at SG Asset Management, told Reuters.

Analysts said fund manager investments are being driven by data and rate expectations in the United States, although the continued upswing in the Japanese economy was also a factor.

The U.S. economy grew a touch faster-than-expected in the first quarter of the year, at 4.4 percent, according to official statistics released earlier this week.

"All of these reports coming out of the U.S. have really focussed investors minds on a soon-to-come Fed tightening," Marcussen said.

Managers of mixed portfolios of stocks, bonds and other assets cut average bond holdings to 37.7 percent in May from April’s 40.80 percent, and raised stocks to 52.88 percent from 50.81 percent.

Average cash balances fell slightly in May, suggesting there was little spare liquidity set aside to put into different assets. Hedge fund and property asset classes were little changed since April.

The poll was carried out between May 21 and 27. The May poll included an additional respondent, which may affect results.


BONDS UNDER A CLOUD
Funds remain negative towards bonds markets apart from corporate debt, on which they stay overweight compared to their benchmarks for the next three months.

Managers of bond funds slightly raised their average percentage holdings of dollar-denominated debt in May, to 27.71 percent from 26.05 percent, while euro zone bond holdings fell to 54.92 percent from 55.68 percent.

It is possible that U.S. bond holdings rose slightly because they have looked quite attractive in price terms after having already come under pressure in recent months, Martina Kocksch, senior portfolio at Cominvest in Frankfurt, told Reuters.

Among equity funds, managers slightly cut their holdings of Japanese debt in May, moving to 7.95 percent from April’s 8.54 percent, the first time Japan holdings have gone down since December last year.

Within equity markets, funds remain overweight in materials and industrials, which are sectors typically best able to exploit a cyclical upturn, but bullishness towards these sectors has cooled a touch since April.

Managers remained negative on sectors such as consumer staples and utilities, which are more defensive areas of the economy.

(Reuters)