Our monthly series offers an updated analysis of our institutional investor indicators.

• Our Institutional Investor Holdings Indicator shows the aggregate holdings of institutional investors across three asset classes: stocks, bonds, and cash. This simple information can tell us a lot about how investors view the economy and markets.
• Our Institutional Investor Risk Appetite Indicator is based on flows — buying and selling activity — rather than portfolio positions. It reveals whether investors, in aggregate, are buying risk or selling it. While the Holdings Indicator tells us about the current location, the Risk Appetite Indicator tells us about the direction of travel.

The State Street Risk Appetite Index fell to 0.18 in September from 0.36 in August, marking its weakest reading since March’s outbreak of war in Iran and bringing to an end a five-month run of institutional risk-taking.

Equity allocations remain historically high at 56.6 percent, but decreased by 0.8 percentage points in September. Fixed income — rather than cash — benefited: Allocations, excluding bills, rose nearly a full percentage point, while cash fell 0.18 percentage points. This was the largest monthly increase in fixed income allocations in more than five years. Although holdings remain historically low, September’s surge suggests long-term investors are finally responding to higher sovereign yields despite a challenging macroeconomic outlook.

Read the commentary from Michael Metcalfe, Head of Macro Strategy, State Street Markets.
The failure of the risk-seeking run captured by the State Street Risk Appetite Index to reach a sixth month was unsurprising. Investors were already significantly overweight equities, while higher oil prices and tighter monetary conditions provided clear reasons to pause. More surprising, however, was where they sought safety. Sometimes, the absent behavior is most telling. Despite weaker price action in both equities and bonds, cash allocations fell modestly and remained below their long-term average. Instead, the 80 basis points decline in equity holdings and 20 basis points fall in cash were allocated to fixed income securities, producing the largest monthly increase in more than five years. With asset managers’ fixed income holdings near a 20-year low, some rebalancing was overdue. But the shift came as yields rose sharply. This may signal that, despite concerns over inflation and the fiscal and political outlooks, longer-term yields are finally high enough to attract long-term investors again.