From ZeroHedge, October 22:
Throughout 2018 (as is the norm outside of an immediate selling
climax), HYG (the US high yield bond ETF) has traded at a premium to its
NAV (underlying cash bond values). Then October struck, global
liquidity spigots began to dry up more rapidly and high yield bonds were
dumped. This pushed HYG into a discount to its underlying as
liquidation needs (hedging) in the ETF dominated selling the illiquid
underlying positions...
And in Emerging Market Debt, it is a disaster where the relatively liquid ETF is trading at 15% discount to the hugely illiquid underlying EM debt instruments...
And, as Bloomberg reports, The UK's largest active manager confirms an imminent liquidity crunch coming to credit markets.
As bouts of late-cycle volatility prompt fears of an impending race
for the exits, Aberdeen Standard Investments - with $736 billion assets
under management - has been switching to products with greater liquidity relative to cash bonds, like credit default swaps. However,
most notably, Aberdeen's fixed income manager Luke Hickman is bucking a
trend that’s taken hold among many of his peers: he's shunning exchange-traded bond funds, fearing a "blowout" in the passive space within the next two years.
“If you’ve been in the market long enough to remember past blowouts, you know that liquidity is key,” Hickmore said...
“High-yield credit and emerging-market ETFs won’t be well placed to handle a liquidity crunch.”
And, as that fear of a liquidity crunch leaks from cash markets to
the ETF, it is the CDS markets that have become a more popular hedging
tool for professionals in recent weeks... (while we note the apples to oranges comparisons below, the shifts are notable)
And in Emerging Markets, while EM CDS markets have begun to push
higher in risk, the ETF dominated the early hedging but has become
extremely expensive (and as we noted above, at a major discount)...
....
MUCH MORE
