Investors abandoned junk bond ETFs in March

Fixed income exchange-traded funds witnessed huge outflows in March as the coronavirus crisis raged, with those carrying European high-yield debt suffering the most, data from the European Securities and Markets Authority (Esma) shows.

From February 19 to March 23, cumulative outflows from EU high-yield bond ETFs totalled 36% of net asset values. Outflows from US high-yield ETFs equalled 15% of NAV, and from EU and US corporate investment-grade funds 11% and 5%, respectively.

 

US investment-grade fund outflows peaked on March 17, at 9% of NAV and have recovered since. On March 17, the Federal Reserve opened a Commercial Paper Funding Facility to buy up the short-term debt of large corporates. A week later it set up two additional facilities to directly purchase corporate bonds on the primary and secondary markets.

European Central Bank data shows eurozone ETF shares outstanding as of January 2020 totalled €867 billion ($936 billion), and that 26% of the assets they held were debt securities.

 

What is it?

Esma produces a quarterly risk dashboard with its assessment of the main risks for markets under its remit and its outlook for the forthcoming quarter. Each assessment is based on the risk categorisation drawn up by the European Supervisory Authorities Joint Committee.

Why it matters

With the coronavirus crisis, financial watchdogs have seen a deep-seated fear realised: a credit shock that sparks a stampede out of bond funds. Esma reported that AAA and BBB bond spreads jumped 81 basis points and 170bp respectively between mid-February and end-March, spikes likely exacerbated by the fire sale of assets held by ETFs to meet redemption requests.

But the greatest shock to fixed income ETFs, and their underlying bonds, lies in the future. The forced sale of billions of dollars worth of ‘fallen angels’ – investment-grade bonds downgraded to junk status – could take place at the end of April, when fixed income index providers rebalance to account for credit downgrades. ETFs tracking these indexes would be forced to alter their allocations to stay in alignment, forcing bond spreads even higher.

Get in touch

Like Risk Quantum? Sign up for free to our daily newsletter and check @RiskQuantum for the latest updates.

If you have any thoughts on our latest analysis or want to suggest other ways to present and analyse the data, you can email us.

Tell me more

Index delays leave passive bond funds in purgatory

EU funds loaded up on US debt in 2019

‘Fallen angels’ pose little threat to EU funds

View all fund stories

  • LinkedIn  
  • Save this article
  • Print this page  

Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.

To access these options, along with all other subscription benefits, please contact [email protected] or view our subscription options here: http://subscriptions.risk.net/subscribe

You are currently unable to copy this content. Please contact [email protected] to find out more.

You need to sign in to use this feature. If you don’t have a Risk.net account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here: