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Investors are preparing for more surprises in 2017 after they were caught off-guard this year by Britain’s vote to leave the European Union and the unexpected rise of Donald Trump.

DON EMMERT/AFP/Getty Images

Forget Federal Reserve interest rate hikes and rising inflation – the thing that's really worrying bond investors at the moment is politics.

More than 30 per cent of high-grade credit investors listed populism in politics as their biggest concern for the next 12 months, according to a Merrill Lynch Global Research report published earlier this week. Just 9 per cent had named it as their main worry in a similar survey conducted in October, ahead of the surprise election of Donald Trump.

Investors are preparing for more surprises in 2017 after they were caught off-guard this year by Britain's vote to leave the European Union and the unexpected rise of the U.S. president-elect. With elections fast approaching in France, the Netherlands and Germany, and anti-establishment leaders gaining support across the European Union, no one wants to be caught out again.

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"December's survey shouts 'populism' at almost every juncture," analysts at Merrill Lynch led by Barnaby Martin said in a research note to clients. "Investors have also tweaked their portfolios to prepare for a more populist world in 2017."

Investors are preparing for the increase in U.S. government spending these leaders have promised by shifting to overweight positions in the bonds of industrial companies, according to the survey. They have also reduced long positions in corporate debt with a maturity of more than 10 years by 54 per cent since October.

Thirteen per cent of the 68 investors polled listed rising bond yields as their biggest concern, up from 6 per cent in October, according to the report. The yield on the Bloomberg Barclays global aggregate index jumped eight basis points to 1.67 per cent this month, touching the highest level since January.

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