By Daniel Kruger
Individual investors are helping power this year's rally in U.S. government debt, a sign many remain cautious even as stocks push to new highs.
Their assets in taxable-bond mutual funds rose by a net $316 billion in the first five months of the year, according to data from Morningstar Direct. 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.
That demand has helped drive the yield on the benchmark 10-year Treasury note, which falls when bond prices rise, to multiyear lows around 2%. The surge in demand is especially notable because investors tend to buy bonds when they're worried, yet stocks have surged to records.
"What they're yielding right now doesn't matter -- I'm looking for the downside protection," said Jim Oetinger, 66 years old, who recently retired as a technology director at a heat-transfer-fluid company and lives in Wallingford, Pa.
Three years ago, only about 10% of his family's $3.5 million portfolio was invested in bonds, said Mr. Oetinger. Since then, he has boosted the fixed-income portion to about 35%, investing in bond funds with a blend of government, corporate and mortgage debt, and plans to add more.
"I'm more concerned about the equity market going down," he said.
Interviews with more than a dozen individual investors and financial advisers indicate many have that concern. The same worries about slowing growth that have led Federal Reserve officials to consider cutting interest rates have pushed many to seek the relative safety of government debt, despite the reduced income from falling yields.
Hopes for easy monetary policy have helped fuel the rally in stocks, with many expecting lower interest rates to reduce borrowing costs throughout the economy, prolonging the expansion. The 10-year yield is a key reference used in setting rates for everything from home mortgages to business loans.
Yet the worries behind such policies, including signs of slowing growth and the trade fight between the U.S. and China, outweigh concern about low returns from government debt, some said.
Treasury Department data on the roughly $1 trillion of new government notes and bonds sold at auction through May 31 show U.S. investment funds -- mutual funds and similar vehicles that typically represent individual investors -- have bought 54% of the debt, excluding Fed purchases. That is on track for an annual record. The percentage has risen from 20% in 2010 and is more than four times the amount bought by foreign investors during the period.
Domestic holdings of Treasury debt have jumped by about $1.2 trillion since the end of 2017, or roughly six times the increase for foreign investors.
And demographics could boost demand further.
As investors approach retirement, they typically increase bondholdings. The population of U.S. residents age 65 or older has increased 45% since 2000 to 50.8 million in 2017, according to the Census Bureau. The median age for investors owning fixed-income assets, ranging from bond mutual funds to individual bonds is 52, according to 2018 data from the Investment Company Institute, up from 49 in 2007.
Paul LaVanway, a 70-year-old retired executive of a specialty-chemicals firm, said he was shocked by the bond rally. The Green Valley, Ariz., resident has about 40% of his $3.5 million in savings invested in bonds. While he describes the return on those assets as minuscule, he said that isn't an immediate concern because he relies more on bonds to stabilize his portfolio against the risk of stock-market volatility than for income.
"I wonder if in terms of yields we're headed to where Europe and Japan are," he said. Negative interest rates in Europe and Japan have left investors effectively paying governments to hold their money when they purchase 10-year government securities.
Many investors look at the records being set in the stock market with a sense of trepidation.
Jason Gasper, 44, who lives in Dallas and manages McKesson Corp.'s private-label generics business, keeps the experience of his parents in mind when he considers how to allocate assets in his roughly $1 million portfolio. His father's retirement account suffered significant losses in the financial crisis, right before he stopped working, and his mother's portfolio took a big hit as well, he said.
Mr. Gasper said he takes a conservative approach and is seeking to avoid "a massive hit." About 20% of his holdings are in bond funds, though "if there's a perception there's instability, that number could ratchet up," he said.
The decline in yields has dented investors' income, posing problems for those who rely on bond income to pay for living expenses.
Diana Tucker, 60, a widow and retired homemaker in Carlsbad, Calif., said "in the long run, if yields stay low," then the small amount of income she would earn from her bondholdings could contribute to a decision in the future to "make some changes" in her life. That includes potentially moving to New Mexico, nearer her mother and sister, where the cost of living is less expensive.
"If you're an income investor, you're going to struggle," said Gary Alt, a fee-only financial planner in Monterey, Calif. For someone around 80 years old, "it's very difficult to make a change at that point," he said.
Write to Daniel Kruger at Daniel.Kruger@wsj.com