Institutional investor confidence is up in March, with North American investors having the rosiest outlook, according to latest reading of the State Street Investor Confidence Index.

The index, which provides a quantitative measure of investor confidence by tracking the trading patterns of institutional investors around the world, indicates that institutional investor confidence is up in March to 82.6 from February’s revised reading of 72.1. The confidence of North American institutional investors rose strongly to 94.1 in March from a revised reading of 83.3 in February. The European Index increased from 78.9 in February to 93.6, and the Asian Index declined slightly from 80.7 to 79.2 in March.

“We see a strong resurgence of interest in broad allocations to risky assets by professional investors,” commented Harvard University professor Ken Froot, one of the index’s developers, along with State Street Associates director Paul O’Connell. “The updraft is very strong in the U.S. and in Europe — strong enough to reverse the recent downward trend in confidence.”

“Investors over the past six months had been quite concerned about the prospects of a protracted tightening in liquidity and were taking a very defensive tack with regard to their portfolios,” commented O’Connell. “In March, we have seen that these concerns have ebbed, leaving investors more optimistic that the Fed need not raise rates much further. This, combined with a sense that growth remains solid, has led to investors acquiring more broadly diversified positions in risky assets — a sure sign of increased confidence.”

“Stories of unwinds in carry trades and lower risk appetite have dominated financial market commentary in the past month. This has been particularly pervasive in currency markets where high yielding and some emerging market currencies have begun to underperform,” noted Michael Metcalfe, senior strategist at State Street Global Markets. “However, the facts are that investors have actually been increasing, not reducing, their appetite for risk in March.” He notes that the index’s 10-point surge is its biggest jump since January 2003. “Given the global index had fallen for three consecutive months prior to this, the implication is that institutional investors are allocating greater proportions of their portfolios to risky assets once more,” he adds.

“Intriguingly, the regional confidence indices suggest this rebound was driven by greater optimism/ less pessimism from U.S. and European investors. In contrast, the confidence of Asian investors actually moderated slightly. While the Fed, ECB and the BoJ have all changed policy in the past four weeks, market reactions have differed,” Metcalfe observes. “Year-end interest rate expectations have fallen in the U.S. this month, but continued to rise quite sharply in both the eurozone and Japan. The implication from this confidence breakdown is that this rise in interest rate expectations is now potentially less worrisome in Europe than it is in Asia and that investors are beginning to share in the new Fed governor’s optimistic-looking assessment of the U.S. economy.”