Funds raise bets on investment-grade bonds, U.S. stocks: Reuters poll

NEW YORK (Reuters) - In a sign of increased optimism about the economic outlook, U.S. money managers increased their stake in investment-grade corporate bonds and U.S. stocks in August, while reducing their exposure to U.S. Treasuries, a Reuters poll showed.

U.S.-based asset management firms increased their average stake in U.S. and Canadian bonds to 64.3 percent from 58.9 percent in July, according to the poll of 13 respondents taken Aug 13-28.

Firms raised their exposure to investment-grade corporates to 35.8 percent from 25.9 percent in July. At the same time, they reduced holdings of higher yielding "junk" bonds to 10.3 percent, down from 13.2 percent in the prior month.

"A number of fixed-income investors want the added yield of corporate bonds, but they are also seeking safety," said Alan Gayle, senior investment strategist at Ridgeworth Investments, with regards to shift away from junk bonds to corporates.

While U.S. and Canadian bonds as a group attracted more investment flows, the firms decreased their overall stake in bonds to 27.6 percent from 28.8 percent in July.

Government securities especially fell out of favor, attracting an average allocation of 38.6 percent, down from 48.8 percent in July. The polling data reflected a marked shift away from U.S. Treasuries.

Russell Price, a senior economist at Ameriprise Financial said the move out of Treasuries is a sign that money managers are feeling more confident in the U.S. economy. He pointed to improving homes sales, business activity and stronger retail sales figures as bolstering that more optimistic view.

The poll also showed a sharp change in expectations about the U.S. Federal Reserve's future plans to stimulate the U.S. economy. Only 44 percent of investors expect it to embark on a third round of bond purchases, or quantitative easing, by end-2012, down from 70 percent in the same poll last month.

The benchmark S&P 500 has risen 2.5 percent in August on speculation of economic stimulus from the European Central Bank and the view the job market is slowly improving.

In another sign investors are becoming more sanguine about the U.S. economy, the yield on the 10-year Treasury is now at 1.65 percent, up from its record low of 1.39 percent in July.

The Reuters poll showed that investment firms increased their overall equity investments to an average 64.6 percent, up from 63.7 percent in July and the highest percentage since April.

These firms targeted U.S. and Canadian stocks, which as a group attracted an average 66 percent of the firms' global equity portfolio, up from 65.4 percent in July and the most in at least 14 months.

"Better-than-expected employment data and encouraging policy announcements in the EU helped support U.S. stocks in August," said Ridgeworth's Gayle, who referred to European Central Bank President Mario Draghi's pledge to do whatever it takes to preserve the euro currency.

Investment in euro zone assets dampened over the month, with average euro zone bond allocation falling to 9.5 percent from 15.3 percent in July and the average euro zone equity allocation falling to 11.4 percent from 11.9 percent.

"The uncertainty surrounding the next steps in the euro zone is running at a fever pitch," said Gayle.

"A lot of investors feel that we're at a very tense period in the negotiations, and they would prefer to wait on the sidelines," he added.

The firms also increased allocation to other kinds of credit such as credit-default swaps and collateralized debt obligations to 15.3 percent from 12.2 percent in July.

(Reporting by Sam Forgione; Editing by Leslie Gevirtz and Toby Chopra)