As debt crisis loomed, retirement investors bolted from bonds

Retirement savers' confidence in the economy stayed fairly steady last month. On the other hand, their confidence in the federal government showed signs of faltering.

May was a suspenseful month for American investors, as President Joe Biden and House Republicans struggled to reach an agreement to raise the U.S. debt ceiling. The two sides finally struck a deal in early June, but all last month it remained possible that the government would default on its debt.

And yet according to Arizent's Retirement Advisor Confidence Index (RACI), retirement investors largely kept their faith in the U.S. economy. The RACI composite score, an aggregate of different confidence indicators, only inched slightly downward, from 48.8 in April to 48.4 in May. (A score above 50 indicates rising confidence, while scores below 50 reflect a decline.)

However, the composite score is inversely related to another figure: the amount of client assets used to buy bonds. And that score sank significantly, from 41.7 to 37 — its lowest point in RACI's 12-year history.

Normally, a decrease in the popularity of bonds — traditionally considered a hedge against stocks, with the exception of last year, when both declined — indicates a more bullish outlook on the economy. But a bond is a unit of government debt, and last month the whole question of whether the government would pay off its debts was thrown into question. 

So to some extent, last month's plunge in bond purchases — and as a result, the steady RACI composite score — may be a sign more of anxiety than of confidence.

Read more: Ask an advisor: In this economy, do I still need bonds in my portfolio?

"I do think it is reasonable to think that elevated concern for a U.S. default played into reduced bond purchases in May," said John Corron, a certified financial planner at Monument Group Wealth Advisors in Concord, Massachusetts.

That nervous outlook is reflected in other RACI data. Clients' total contributions to their retirement plans, for example, dropped from 59.1 in April to 52.5 in May — the score's lowest point in almost a year.

And many clients are still concerned about a potential recession — 38% said they were more worried in May than in April that a downturn was on its way. 

Anxiety about inflation, however, was not as common. Only 25% of clients said they were more worried about rising prices in May, while almost just as many — 23% — said they were less worried.

That may be because inflation did, in fact, go down last month. In May, the year-on-year change in the consumer price index eased down from 4.9% to 4% — its 11th consecutive decrease in as many months.

Meanwhile, clients' risk tolerance inched up slightly, from 44.8 in April to 47 in May. But like the composite score, this is partly due to the decrease in bond purchases.

And as clients shied away from bonds, they showed more interest in stocks. The amount of client assets spent on equities crept up from a score of 53.9 in April to 57.5 in May.

Some wealth managers, however, said their customers' retirement portfolios didn't change much at all. Noah Damsky, the co-founder of Marina Wealth Advisors in Los Angeles, said his clients stayed just as invested in bonds during the debt ceiling negotiations as they had been before — and that's important.

"When we start to work with clients, we explain that our long-term process often excludes reacting to short-term headlines," Damsky said. "The debt ceiling was just that: a short-term headline and noise. As a result, when these sorts of short-term headlines emerge, clients stay calm and look past it."