Small investors seeking safety as the stock market reaches new highs in 2019 have become a dominant force in the U.S. bond market. These individual investors are on track to buy a majority of the U.S. government’s newly issued longer-term debt this year for the first time since the Treasury Department began publishing data from its auctions. Individual investors added $316 billion in taxable-bond mutual assets in the first five months of the year, reflecting a booming demand for downside protection even as the stock market rallies, as outlined by the Wall Street Journal

Investors Favor Safety of Government Debt Over Stock Returns 

After a particularly rough end to 2018, in which the S&P 500 posted its worst performance in nearly a decade, U.S. stocks are back on a tear. The widely followed index has now surpassed the 3,000 level, posting a whopping 19.8% return year-to-date (YTD) through Tuesday close. 

Yet despite the stock market’s stellar performance, investors remain cautious. Demand for downside protection through buying bonds has helped drive the yield on the benchmark 10-year Treasury note, which falls when bond prices rise, to multiyear lows around 2%. 

“What they’re yielding right now doesn’t matter—I’m looking for the downside protection,” said 66 year old investor Jim Oetinger. 

Mr. Oetinger, a recently retired former technology director at a heat-transfer-fluid company, says his family’s $3.5 million portfolio shifted from a 10% weight in bonds, to 35% in fixed income assets. He invests in bond funds with a blend of government, corporate and mortgage debt, and is planning to increase this portion of his portfolio. 

“I’m more concerned about the equity market going down,” said the retired investor. 

Many Still Cautious About U.S. Equities

Mr. Oetinger isn’t the only equity bear who is seeking the safety of government debt despite the reduced income from lower yields. The WSJ interviewed more than a dozen individual investors and financial advisers that share his outlook, citing concerns over decelerating economic growth that has led the Federal Reserve to become more dovish in its policy. 

Some are expecting the Fed to cut interest rates in the current environment. Lower rates typically means sustained momentum in the stock market, given it reduces borrowing costs throughout the economy, such as lower home mortgages and business loans. 

The demand for government debt demonstrates that for many, fears of headwinds such as slowing growth and trade wars between the U.S. and China outweigh concerns of lower yields. This explains why U.S. mutual funds and similar vehicles that typically represent individual investors have bought 54% of the roughly $1 trillion of new government notes and bonds sold at auction through the start of the year to May 31st.

This data, which excludes Fed purchases, shows that individual investors are on track to own their largest percentage of government debt ever -- up 20% since 2010 and four times the amount purchased by non-U.S. investors during the period. Domestic holdings of Treasury debt have jumped by approximately $1.2 trillion since the end of 2017, about since times the increase for foreign investors, per the WSJ. 

Changing U.S. Demographics Favor Bonds

The demand for government bonds could increase even more as investors age and reach retirement, given individuals at this stage typically increase their fixed income investments. According to the Census Bureau, the population of U.S. residents age 65 or older has risen 45% since 2000, to 50.8 million in 2017. The median age for investors owning fixed income assets is 52, up from 49 in 2007, per data from the Investment Company Institute. For some, minuscule returns on fixed income assets could represent a major risk to their financial plan.