From the Financial Times, February 24, 2015:
Risks squeezed out of banks pop up elsewhere
Barclays analysts warn of ‘fire sale’ fears for bonds and ETFs
Investors are reaching for a toolkit of exchange traded funds, mutual funds and credit derivatives to make up for a dearth of liquidity in parts of the financial system, according to market participants and research from Barclays.
Regulations intended to improve the stability of the financial system after the 2008 crisis have sucked liquidity from large swaths of the financial market, making it more difficult to trade assets without affecting their prices.Remember, those numbers were from February 2015. Here's something more recent from MarketWatch, July 27, 2018:
At the same time years of low interest rates have encouraged large investors to pour money into similar positions, further sapping their ability to dart in and out of investments, and forcing them to consider new ways of trading assets.
Many have turned to ETFs, mutual funds and certain derivatives to make up for a lack of liquidity. ETFs use a network of banks and trading firms to give investors cheap and instant exposure to a wide variety of assets. The trend is particularly pronounced in the fixed income market, where new rules aimed at increasing bank capital and reducing the risk of a run in the “repo market”— Ground Zero for the financial crisis — are said to have most hurt ease of trading.
Barclays analysts led by Jeffrey Meli warn that regulators may have traded extra safety in the repo market and banking system for a new type of “ fire sale” risk in ETFs and bond funds as investors make increasing use of the alternative trading vehicles.
“Regulations aimed at bolstering stability at the core of the financial system, combined with a growing demand for liquidity, may eventually lead to increased instability and fire-sale risk in the periphery,” the analysts said in research published on Tuesday. They cited risks in the secondary market for illiquid assets such as corporate bonds and leveraged loans.
“ETFs are being used not only by end investors looking for instruments with daily liquidity, but also by mutual funds seeking to mitigate the differences between the liquidity their investors expect versus the (poor) liquidity available in the underlying bonds,” they said.
Taxable bond funds have received $1.2tn of inflows since 2009, according to the Barclays report, with $588bn flowing into investment-grade corporate funds alone. Meanwhile, credit ETFs have grown to account for about 2.5 per cent of the investment-grade corporate debt market and almost 3 per cent of the junk bond market....MUCH MORE
Why my firm sold short-term bond ETFs and bought U.S. Treasury bills
Recently my firm replaced all of our short-term bond exchange-traded funds with U.S. Treasury bills. The core motive for this decision was not to pick up a few points of extra yield, though that’s a nice bonus. We sold these ETFs because we were concerned about the low-probability but still possible risk mismatch in liquidity between the ETF and the securities it holds, in the event of a (not-low-probability) panic sell-off in the market.Finally with a slightly opposing view (it's open-ended funds that are the risk, not ETFs), back to Alphaville, March 2018.
Our problem with the ETFs concerned liquidity. Liquidity is measured on two dimensions, time and price — it is the degree to which an asset can be bought or sold without impacting its price. For instance, a house is not really a liquid asset. If you want to sell it fast you might have to lower the price significantly to find buyers. On the other hand, stocks of large companies and U.S. Treasury bills are incredibly liquid.
Yet this definition of liquidity is not complete. Liquidity of an asset may or may not be constant — it can change from one environment to another. Today, in a benign economic and market environment, many assets provide a false sense of liquidity. But this may change on a dime when this artificially created calm gets roiled....MORE
