Premium
4 min read . Updated: 01 Jun 2022, 06:17 PM IST Meme stocks are fading. Crypto has cooled. The latest hot investment for individual investors: U.S. government bonds.
Lured by higher interest rates and spooked by turmoil in stocks, investors poured a net $20 billion into mutual and exchange-traded funds that focus on buying ordinary U.S. Treasurys over the four-week period ended May 25, according to Refinitiv Lipper. That marked the largest infusion over a four-week span in records going back 29 years.
That is just the start. Individual investors grabbed $928 million of two-year notes at a recent government-debt auction, the most in more than 15 years, selecting bonds themselves partly to dodge management fees. They also have swamped the Treasury Department in pursuit of the government’s inflation-linked savings bonds, now paying an initial interest rate of 9.62%.
So many people have wanted to buy so-called I bonds that the agency has shifted staff to a call center and made changes to its direct-to-consumer TreasuryDirect website, while apologizing for unusually long wait times. Sales of the bonds through TreasuryDirect, which are limited to $10,000 a person each year, have totaled a net $14.9 billion since November, about $6 billion more than the previous 20 years combined.
Jerry Gray, a recently retired resident of White Pigeon, Mich., is among those who have turned to government bonds in recent months. Having previously worked in sales at a faith-based asset-management firm, Mr. Gray bought some I bonds in December after getting wind of their high interest rates.
More recently, he started buying Treasury bills through TreasuryDirect after talking with bankers at his Kiwanis club about the dim outlook for deposit rates, which have trailed bond yields because many banks are already flush with deposits.
“Rates are going up so fast, I want to ride the wave up," he said.
The surging interest from individual investors is particularly notable because bonds have had one of their worst years ever in 2022.
Expectations that the Federal Reserve will keep aggressively raising interest rates to fight inflation have driven down the prices of existing bonds to reflect the risk that new Treasurys will be issued with larger coupons. That, however, has lifted yields on Treasurys—increasing their appeal to investors who think their prices won’t fall much farther or plan to hold them to maturity.
Helping matters, stocks—which also are vulnerable to rising rates—have performed even worse than bonds this year, prompting large outflows from equity funds in recent weeks.
Allan Roth, a financial planner with Wealth Logic, said it makes sense to buy stocks now after their prices have fallen, but it is natural that people instead “run to safety" and buying I bonds is “low-hanging fruit" for investors given their high interest rates.
Individual investors’ changing attitudes often aren’t enough to shift the prices of government bonds. Much of the demand for Treasurys comes from other sources, such as hedge funds, pensions and insurance companies, as well as various types of overseas buyers.
Flows into different types of funds also can work at cross-purposes with each other. Overall, net inflows into U.S. Treasury funds have totaled $52 billion this year, according to Refinitiv Lipper. Yet there has been a $28 billion net outflow from so-called core and core-plus bond funds, which tend to buy substantial amounts of Treasurys, along with riskier bonds.
Steady inflows into government-bond funds earlier this year didn’t stop a massive selloff in Treasurys that lifted the yield on the benchmark 10-year note from 1.496% at the end of December to 3.124% on May 6.
Still, the record surge of cash into the funds in recent weeks has coincided with a broad increase in demand that has dragged the 10-year yield back to 2.842% as of Tuesday.
Wall Street analysts currently have mixed opinions about the outlook for government bonds. Most agree that short-term rates will continue to rise as the Fed proceeds on its current path. Differences, though, arise over whether the Fed will be forced to raise rates higher than investors now expect to tame inflation, causing another drop in bond prices.
Anyone who buys a government bond when it is issued and holds it to maturity is guaranteed a return that matches the bond’s interest rate, absent the unlikely event of a government default. But people who need cash sooner can still suffer losses, as this year has shown.
As of Monday, a broad ICE BofA index of U.S. Treasurys, with an average maturity of about eight years, had delivered a negative 8% return this year. Even an index of typically stable short-term Treasurys, with an average maturity of 1.8 years, had lost 2.2%, reflecting this year’s drastic adjustment in interest-rate expectations.
That historically bad performance, however, is still better than that of the S&P 500, which has slid 13% this year, or an ICE BofA index of investment-grade corporate bonds, which has returned minus 12%. Through Monday, the broad index of Treasurys had returned 0.6% in May as bond yields stabilized.
This story has been published from a wire agency feed without modifications to the text