By Rahul Karunakar
(Reuters) - U.S. funds increased recommendations for bond holdings to a more than two-year high in May and cut equities to the lowest since October, citing the political crisis in Italy and rising risks of a trade war, a Reuters poll showed.
Stocks, the euro and Italian bonds were hit this week on concerns a eurosceptic government in Italy could threaten Europe's hard-won financial stability over recent years.
The benchmark 10-year U.S. Treasury yield (US10YT=RR) fell by the most in one day in nearly two years on Tuesday, while two-year note yields had their biggest daily spill in more than nine years.
That has drawn the attention of global fund managers as well as short-term traders.
The monthly survey of 12 U.S.-based asset managers taken May 15-31 showed global bond allocations accounted for an average 35.8 percent, up from 34.9 percent the previous month, and the highest since February 2016.
Stock allocations were cut to 56.9 percent, down from a 4-1/2-year high of 57.9 percent in April. The remainder was spread among cash, property and alternative investments.
"The situation in Europe looks very uncertain and unless there is absolute clarity on what happens in Italy, it is best to shelter into Treasuries," said a fund manager at a very large U.S. investment firm.
"For now, we will just have to see how things progress on that front. There is also the risk of an escalation in trade frictions."
For the moment, there appears to be no let-up. Washington will announce plans to impose import tariffs on steel and aluminum from the European Union this week, Reuters sources briefed on the matter said.
(Reporting and polling by Rahul Karunakar and Vivek Mishra; Editing by Toby Chopra) OLUSECON Reuters US Online Report Economy 20180531T110630+0000