Retail Traders Flock to Bond Markets for Bigger Yields

Retail investors are flooding the debt markets, hoping to take advantage of some of the highest bond yields in more than a decade. The US Federal Reserve’s decisive monetary tightening has caused the 10-year treasury bond yield to hover around 4% after touching its highest level since 2007. 

Retail investors are seeing bonds as a meaningful alternative to equities for traders who are comfortable with risk. In truth, individual retail investors are small fry when compared to institutional buyers in the gargantuan US bond markets. However, the same factors are attractive to pension funds and insurance companies – locking in high interest income over the long term – are now attractive to retail traders.

Of course, higher yields in riskier credit markets come with their own dangers. US investment-grade corporate bonds have lost around 18% this year on a total return basis as Fed officials fought inflation with rate hikes.

There continues to be serious retail interest in bonds. When interest rates were low, bonds were not the territory in which retail investors preferred to play. Now bonds are seen as an important part of the average portfolio.

US credit markets have rallied on the possibility that cooling US inflation could allow the Fed to take a less aggressive stance. Analysts still feel interest rates will be high for the foreseeable future, albeit going up at a slower pace, which means the interest in the bond markets will continue.