Why are retail investors unloading Treasuries – and institutions buying?

Retail and institutional investors are not quite on the same page when it comes to the Treasury bond market. While institutions have been moving money out of riskier assets and into safe havens — including, remarkably, Treasuries — retail investors have been bailing out of U.S. government debt. Chris Shayne, senior market strategist for BondDesk Group LLC, said there are far more sellers of Treasuries than buyers on the electronic bond-trading platform that the firm maintains. The company aggregates odd-lot bond inventories from Wall Street fixed-income dealers and makes them available to thousands of brokers to buy and sell on behalf of retail investors. As might be expected with the debt ceiling debate and S&P's downgrade of the U.S. credit rating, trading volumes of U.S. Treasury securities on the platform have increased dramatically in the past two weeks, Mr. Shayne said. The 1,123 transactions recorded yesterday were about twice the average on the network prior to the dramatics of the last couple of weeks. Ironically, while institutions have driven up the prices of Treasuries in the aftermath of the downgrade, the little guys are selling. “Retail investors are behaving differently than the institutional community in the market,” Mr. Shayne said. “There have been far more sellers than buyers back to the last week of July.” Last Monday, the day after the debt ceiling deal was announced, the ratio of buyers to sellers of Treasury bonds on the BondDesk platform was approximately 0.5 to 1. That compares to a ratio of about 1.2 to 1 back in June. The ratio fell still further through last week and rose to about 0.6 to 1 yesterday, Mr. Shayne said. As of 2 p.m. ET today, there were 501 orders to sell versus 240 to buy — once again showing a strong bearish bias on Treasuries among retail investors. Still, institutional investors have continued to bid up T-bond prices. Is this another case of retail investors losing out to the “smart money?” Not necessarily, Mr. Shayne said. “The retail side is a tiny drop in the ocean compared to the institutional market, and they're clearly going counter to the market. But it's too early to tell who's right,” Mr. Shayne said. “The retail investors could be selling for handsome profits.” Indeed, with Treasury yields across the maturity curve at or near record low yields after the Federal Reserve today said it would keep interest rates down through mid-2013, small investors may win out on this one.