“Folks in the ETF industry are shaking their heads trying to figure out how they’re going to stay in the junk-bond ETF business if these proposals are put in place without modification,” Nadig told the WSJ.
The liquidity rules would be especially hard to meet for bond ETFs, such as the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) and the SPDR Barclays High Yield Bond ETF (NYSEArca: JNK), that track notoriously illiquid fixed-income markets. [Reviewing the Liquidity of Junk Bond ETFs]
Some market observers have already warned of the impending liquidity issues that junk bond ETFs may face. For instance, Michael Contopoulos, head of high-yield strategy at Bank of America, called high yield credit a “big, big problem,” reports Michael Newberg for CNBC.
The excess liquidity from the Fedederal Reserve’s massive bond buying program and near-zero interest rates “have created an environment where high yield corporates have been able to gather funding at incredibly cheap levels,” Contopoulos said. “At some point, unless you have meaningful earnings, you can’t sustain incredibly high leverage indefinitely.”
For more information on the speculative-grade debt market, visit our junk bonds category.
Max Chen contributed to this article.