Retail traders are betting that the dramatic declines in some of the more defensive areas of the market have gone too far, according to Vanda Research. Marco Iachini, the firm’s senior vice president, said in a note on Thursday afternoon that individual investors are buying a major long-term bond fund — the iShares 20+ Year Treasury Bond ETF (TLT) — at a record rate even as it has been falling sharply. “Retail investors are seizing opportunities from the rise in long-term government yields, albeit selectively. … Retail purchases of TLT have reached unprecedented levels this past week. The takeaway is that retail traders have actually sought to buy this historic dip in one of the more popular Treasury ETFs,” the note said. Treasurys are typically seen as a safe asset that can help offset the volatility of stocks, but the TLT is down more than 8% over the past month as long-term interest rates have jumped to their highest level since 2007. Premarket trading showed that the fund was set to fall another 1.5% on Friday. TLT 1M mountain The price of long-term bonds has fallen sharply over the past month, as shown by the TLT. The move to buy the dip in defensive sectors is not limited to bonds. Vanda said that a similar pattern is happening in the Utilities Select Sector SPDR ETF (XLU) . “While purchases of utilities stocks are typically of a significantly smaller scale than purchases of tech stocks, the US$ +32mn inflow seen over the past week is far larger than any other prior 5-day stretch, easily surpassing inflows into the sector at the onset of the Covid downturn,” the note said. The buying in utilities comes after the sector saw historically bad trading breadth earlier this week. Utilities stocks can be hit hard by rising interest rates because it makes their dividend yields less attractive while also making it more expensive for the debt-laden companies to operate. The XLU is down 8.7% over the past month. If the move in rates calms, larger investors could come back to utilities as well, Vanda said. “The flip side of this dynamic is that institutional investors have likely lightened up their utilities exposure during this bond sell-off episode, making the sector a potentially more appealing equity bet should rates be nearing a local peak,” the Vanda note said.
