Rise of Bond ETFs Mean Little Mourning for the Middlemen – FT
December 9, 2016 \ 5 Comments
Full Article: Financial Times
ETFs have become the easiest way for US and European investors to trade bond risk without a middleman. The bond ETF is adding liquidity, sharpening price discovery, and reducing pressure on banks’ balance sheets, especially under stress
There’s no doubt that ETFs are having an impact on trading activity in fixed income, but it seems to me that the underlying processes of creation and redemption will generate activity in the underlyings as well as “upstairs” block ETF trades put together by brokers.
Exchange traded ETF’s bring together retail and institutional interest in a myriad of investment strategies across several adjacent FI products. I believe that has to drive flow downstream for larger outright and complex cash trades. Long term plus for the “middlemen”, whomever they may be. Their business model may evolve, but you will need them more than ever.
Here is something to think about. How do you value a corporate bond ETF if there are no underlying markets/prices in the bonds making up the ETF????
By definition do the ETF market makers also become the de facto market makers for the underlyings as opposed to today where many of the AP’s activity is dominated by taking liquidity?
ETF’s are certainly the product of the day at the moment driven in no small part by Blackrock referring to them at every turn which again is no surprise given they generate a significant amount of revenue from the product. There is significant discussion about the consolidation of the corporate bond market and the role the banks played in ensuring they were the biggest winners, I wonder when someone is going to start looking at the ETF market and the ‘Asset Managers’ who are blatantly pushing the ETF product. I would also suggest the comment on ‘In 2008 global banks… Read more »
I am a bit late to this discussion, but there is a very important point to make about ETF liquidity; it is absolutely not dependent on secondary bond market liquidity. Firstly ETF market makers are rarely bond dealers, they are usually equity dealers. Secondly ETFs have primary and secondary liquidity. Primary is creation and deletion of ETF shares by APs that can require the buying and selling of underlying cash bonds. Worth noting that an ETF can diverge from the list of index constituent bonds by optimisation. Secondary liquidity is the buying and selling on an exchange of ETF shares.… Read more »
Blackrock’s Richard Prager: The Liquidity Is Out There – Institutional InvestorMarch 18, 2016
Everyone is Worried About the Thing Markets Need Most, But They’re Not Asking the Right Questions – Business InsiderMarch 25, 2016
US Companies Overpaying for Bonds; Banks May Be to Blame – ReutersMarch 31, 2016