A speculative-grade, junk bond exchange traded fund has experienced extreme ebbs and flows in assets under management, reflecting banks and institutions’ reliance on a high-yield bond ETF to access the underlying debt market.
Over the past month, the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) experienced record-breaking daily withdrawals, despite its relatively stable performance, and the flows often followed or preceded huge deposits, reports Lisa Abramowicz for Bloomberg. HYG is up 1.3% for the past month.
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The heightened volatility in daily flows suggests that the increased activity is a result of rising usage among bond dealers. Banks may be utilizing HYG as an alternative to their own stockpiles of riskier debt securities, relying on an ETF as an easy source of bonds for client redemptions.
For instance, if a client gives money to a dealer to buy certain amount of high-yield debt, the broker could use the money to acquire a junk bond ETF that can be redeemed in kind for underlying debt securities, which is then given back to clients.
[related_stories]Abramowicz pointed out that the flows in and out of the largest junk bond ETF have been increasingly volatile, even though prices have not been relatively stable. Meanwhile, trading volumes in the fund have increased, and trading in the underlying debt market has not been particularly elevated either.
ETFs offer a convenient solution for dealers with clients redeeming debt securities. Unlike mutual funds, which sell securities for cash in cases of client redemptions, ETFs allow investors to exchange shares for baskets of underlying securities. However, the caveat is that someone would need to be comfortable with dealing in the large volume required to swap out baskets of securities.
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However, as dealers rely more on ETFs, there is less reliance on sourcing individual buyers and sellers for bonds, which may mean that dealers won’t be as capable of handling a quickly deteriorating debt market. If a group of big investors suddenly made a run on high-yield debt and dealers use HYG to service the redemptions, the ETF shares could see value precipitously plunge and potentially fuel a spiral of panic sells.
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