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.

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