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By Karin Strohecker
LONDON, Jan 12 (Reuters) - Global investors kicked off 2018 with "blockbuster" inflows into equities, corporate bonds and emerging market debt, Bank of America Merrill-Lynch (BAML) said, warning its key risk indicator could soon flash sell signals.
With data showing developed as well as emerging economies growing at a healthy clip, global stocks got off to a stellar start to the year, with several benchmarks breaking records in the first trading week.
Indications that central banks were moving slowly to tighten policy supported sentiment.
"Second largest week ever of inflows into emerging market debt, big inflows to investment grade and high-yield bonds, second largest inflows into tech... investors double down on bull market leadership," BAML strategists wrote in a note released on Friday, dubbing the investor mood "maximum bullish".
Across asset classes, the data showed that equities enjoyed the sixth biggest inflows on record, taking in $24.4 billion, of which $21.7 billion went into exchange-traded funds.
Debt funds enjoyed the largest inflows in 31 weeks with $13.7 billion.
Investment grade bond funds enjoyed a 55th straight week of inflows, raking in $8.1 billion while high-yield debt funds added $1.5 billion, their biggest intake in nearly a year, and emerging debt inflows stood at $3.6 billion.
Treasury funds saw redemptions of $0.5 billion.
BAML noted that so far, only government bonds seemed to care about the Bank of Japan and the European Central Bank saying they would soon join the U.S. Federal reserve in tapering $12 trillion worth of asset purchases.
While U.S. Treasuries were on track for the worst January since 2009, central banks' shifting policy against a backdrop of low inflation would lead to a flatter yield curve rather than a bond shock, they added.
"If the ultimate destination for a bear market in Treasuries is a 10-year yield below 3 percent, then greed in credit and equities will continue to trump fear," BAML predicted.
Geographic distribution across equity flows showed the U.S. enjoying a $6.4 billion inflow, with large-cap and growth stocks in favour. Japan added $3.2 billion, Europe continued to reverse December outflows, adding $2.2 billion, while emerging markets raked in $4.3 billion.
The bullish mood has however sent BAML's risk indicator shooting to 7.1 from 6.2, which the bank said was nearing a sell signal. But it suggested investors "stay long risk assets until sentiment reaches euphoric territory of 8.0."
They added: "Peak positioning on its way but we expect asset prices to overshoot first." (Reporting by Karin Strohecker; editing by John Stonestreet)