The minutes which were for the federal open markets committee meeting three weeks earlier showed increasing concern about the outlook for inflation. Some FOMC members were also worried about excessive liquidity and risk taking.David Bowers, the chief global investment strategist at Merrill Lynch, said: “Its almost an irrational exuberance warning all over again”. As a result fund managers have become noticeably more pessimistic about the outlook for interest rates. What is regarded as a neutral federal funds rate one that is neither stimulative nor restrictive has risen to 3.4% (nominal) compared with 3.0% six months ago. A quarter of the panel see a neutral rate as 4.0% or higher. Bowers said: “A very powerful shift is taking place.” He added that it has not finished yet. As a result of this shift managers are becoming more nervous about risky assets. “When the Fed tightens highly leveraged asset classes are at risk,” said Bowers. As a result a net 17% of fund managers are planning to reduce the beta (market sensitivity) of their portfolios compared with 7% in December. Another indication of growing risk aversion is the growing preference for government bonds rather than corporate bonds. This month a net 37% expected government bonds to deliver better returns than corporates compared with 12% two months ago. In addition, Bowers said that four asset classes traditionally act as indicators of growing risk aversion: emerging market debt, emerging market equities, high yield debt and American smaller companies. “These are the four canaries to look at,” he said. The final theme that comes out of this months survey is the strong preference that fund managers have for companies to return cash to shareholders. This could take the form of higher dividends or share buybacks. In January the net percentage of fund managers who favoured such a strategy was an all-time high of 49%. Some 35% even wanted firms to boost their return on equity by issuing debt to buy back their shares. In contrast, those who wanted to improve their balance sheets a key theme back in 2002 only accounted for 12% of the total. Some 35% said they would most like to see companies increase their capital spending. The Merrill Lynch regional survey based on the opinions of regional specialists rather than global managers was also dominated by hawks. The banking sectors in Asia and Europe stood out as areas of relative bullishness. A total of 319 fund managers, with $1.035 trn (£553bn) under management, participated in the global and regional surveys from January 7-13. The survey was conducted with Taylor Nelson Sofres, a market research company.