Bonds: As Well As And Then There's The Etf/Etf Holdings Liquidity Mismatch

Following upwardly on Mr. McCrum's Alphaville post linked immediately below nosotros see 1 of his onetime comrades-in-arms, Tracy Alloway (yes, that Alloway, counterparty to the notorious Kaminska petroleum merchandise of '15)

From the Financial Times, Feb 24, 2015: 

Risks squeezed out of banks popular upwardly elsewhere
Barclays analysts warn of ‘fire sale’ fears for bonds together with ETFs

Investors are reaching for a toolkit of telephone substitution traded funds, usual funds together with credit derivatives to brand upwardly for a dearth of liquidity inwards parts of the fiscal system, according to marketplace seat participants together with interrogation from Barclays.

Regulations intended to amend the stability of the fiscal arrangement afterwards the 2008 crisis bring sucked liquidity from large swaths of the fiscal market, making it to a greater extent than hard to merchandise assets without affecting their prices. 

At the same fourth dimension years of depression involvement rates bring encouraged large investors to pour coin into like positions, farther sapping their powerfulness to dart inwards together with out of investments, together with forcing them to consider novel ways of trading assets. 

Many bring turned to ETFs, usual funds together with sure enough derivatives to brand upwardly for a lack of liquidity. ETFs role a network of banks together with trading firms to give investors inexpensive together with instant exposure to a broad diverseness of assets. The tendency is peculiarly pronounced inwards the fixed income market, where novel rules aimed at increasing depository fiscal establishment uppercase together with reducing the opportunity of a run inwards the “repo market”— Ground Zero for the fiscal crisis — are said to bring most wound remain of trading. 

 Barclays analysts led past times Jeffrey Meli warn that regulators may bring traded extra security inwards the repo marketplace seat together with banking arrangement for a novel type of “ burn sale” opportunity inwards ETFs together with bond funds equally investors brand increasing role of the alternative trading vehicles. 

 “Regulations aimed at bolstering stability at the heart of the fiscal system, combined alongside a growing need for liquidity, may eventually Pb to increased instability together with fire-sale opportunity inwards the periphery,” the analysts said inwards interrogation published on Tuesday. They cited risks inwards the secondary marketplace seat for illiquid assets such equally corporate bonds together with leveraged loans. 

“ETFs are existence used non precisely past times halt investors looking for instruments alongside daily liquidity, but also past times usual funds seeking to mitigate the differences betwixt the liquidity their investors hold back versus the (poor) liquidity available inwards the underlying bonds,” they said. 

Taxable bond funds bring received $1.2tn of inflows since 2009, according to the Barclays report, alongside $588bn flowing into investment-grade corporate funds alone. Meanwhile, credit ETFs bring grown to concern human relationship for most 2.5 per cent of the investment-grade corporate debt marketplace seat together with almost three per cent of the junk bond market....MUCH MORE

Remember, those numbers were from Feb 2015. Here's something to a greater extent than recent from MarketWatch, July 27, 2018:

Why my theatre sold short-term bond ETFs together with bought USA Treasury bills

Recently my theatre replaced all of our short-term bond exchange-traded funds alongside USA Treasury bills. The heart motive for this conclusion was non to alternative upwardly a few points of extra yield, though that’s a overnice bonus. We sold these ETFs because nosotros were concerned most the low-probability but withal possible opportunity mismatch inwards liquidity betwixt the ETF together with the securities it holds, inwards the effect of a (not-low-probability) panic sell-off inwards the market.

Our employment alongside the ETFs concerned liquidity. Liquidity is measured on ii dimensions, fourth dimension together with cost — it is the bird to which an property tin live on bought or sold without impacting its price. For instance, a identify is non actually a liquid asset. If yous desire to sell it fast yous mightiness bring to lower the cost significantly to abide by buyers. On the other hand, stocks of large companies together with USA Treasury bills are incredibly liquid.

Yet this Definition of liquidity is non complete. Liquidity of an property may or may non live on constant — it tin alter from 1 surroundings to another. Today, inwards a benign economical together with marketplace seat environment, many assets render a simulated feel of liquidity. But this may alter on a dime when this artificially created calm gets roiled....MORE

Finally alongside a slightly opposing sentiment (it's open-ended funds that are the risk, non ETFs),  back to Alphaville, March 2018.