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Thriving ETFs May Be Stoking a ‘Liquidity Illusion’ for Bonds – Reuters

IllusionFlows into exchange traded funds with exposure to fixed income markets are at record highs, a boost to thinning market activity but one that some fear could become a source of volatility. Full Article
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  • Chipper
    ChipperFebruary 5, 2016"Fully agree with Charlie here, will put. I think it likely that individual investors are using ETFs as a liquid alternative to mutual funds, and that is a great development for the investor. The liquidity fears have not yet come to pass despite many volatile market days with robust ETF activity. At the TABB forum last week, on an ETF panel they noted that during the biggest drop in the HY market in January, 95% of the HY ETF volume was internalized at the exchange - i…"
  • Merlin
    MerlinFebruary 4, 2016"Did a little digging and if my numbers are right the largest HY etf has a daily trading value of just over 1B while the largest Hg etf is 400mm. I guess to be fair you may want to add up all the volume in each category but I find this interesting. It seems the less liquid HY market has an ETF with very significant volumes to the cash market whereas HG does not (pls correct me if I have this wrong). Guessing this means that the illiquidity of the hy cash market makes t…"
  • Wolfman
    WolfmanFebruary 4, 2016"If people view ETFs as liquid and then apply that view of liquidity to the individual bonds, then yes, it is an illusion. ETFs are a wonderfully designed product designed to add yet another revenue stream for the APs responsible for the redemption/creation cycle. Is it abundantly clear what the cost of the underlying bonds are? Not really, but it is clear what the cash flows are and the yield is, so it seems that, like all things capitalistic, the market has decided t…"
  • Goose
    GooseFebruary 4, 2016"Searching for news articles, there seemed to be instances where even equity ETF’s have experienced large dislocations during periods of volatility and heavy retail selling. For fixed income ETF’s, the transparency, market makers, wider distribution, heterogeneous investing community, arbitrage mechanism all make a generic case for ETFs being a superior liquidity vehicle for expressing a FI risk view. Given the equity look and feel, if there is a liquidity illusion I a…"

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5 Comments on "Thriving ETFs May Be Stoking a ‘Liquidity Illusion’ for Bonds – Reuters"

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Charlie
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Question: Are ETFs replacing investors trading in individual bonds or are ETFs replacing bond mutual funds? Are retail investors finally rebelling against entering a an order at 10 a.m. and getting the closing price at 4 p.m while the market continues to whip around? If I own an ETF I can exit / enter right now at a price I can decide to accept or decline. Or are investors tiring of the restrictive role of broker dealers paying a bid / offer spread. The answers probably differ depending on whether we are talking about retail or institutional buyers. The ‘liquidity… Read more »
Stinger
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Fully agree with Charlie here, will put. I think it likely that individual investors are using ETFs as a liquid alternative to mutual funds, and that is a great development for the investor. The liquidity fears have not yet come to pass despite many volatile market days with robust ETF activity. At the TABB forum last week, on an ETF panel they noted that during the biggest drop in the HY market in January, 95% of the HY ETF volume was internalized at the exchange – ie only 5% represented net creation/redemption using the underlying bonds or cash. Institutional investors… Read more »
Goose
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Searching for news articles, there seemed to be instances where even equity ETF’s have experienced large dislocations during periods of volatility and heavy retail selling. For fixed income ETF’s, the transparency, market makers, wider distribution, heterogeneous investing community, arbitrage mechanism all make a generic case for ETFs being a superior liquidity vehicle for expressing a FI risk view. Given the equity look and feel, if there is a liquidity illusion I am guessing it lies with the retail investor. Bond exposure with equity liquidity? The truth probably lies somewhere in between. In times of volatility, it will be easier to… Read more »
Wolfman
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If people view ETFs as liquid and then apply that view of liquidity to the individual bonds, then yes, it is an illusion. ETFs are a wonderfully designed product designed to add yet another revenue stream for the APs responsible for the redemption/creation cycle. Is it abundantly clear what the cost of the underlying bonds are? Not really, but it is clear what the cash flows are and the yield is, so it seems that, like all things capitalistic, the market has decided that it knows the cost and trading is quid. Listen, the industry is struggling to find ways… Read more »
Merlin
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Did a little digging and if my numbers are right the largest HY etf has a daily trading value of just over 1B while the largest Hg etf is 400mm. I guess to be fair you may want to add up all the volume in each category but I find this interesting. It seems the less liquid HY market has an ETF with very significant volumes to the cash market whereas HG does not (pls correct me if I have this wrong). Guessing this means that the illiquidity of the hy cash market makes the etf an interesting substitute whereas… Read more »
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