A long article that might be summarized as “people are worried about bond market liquidity:” … … … … And they call it out:
A long article that might be summarized as “people are worried about bond market liquidity:”
All told, there are many millions of individual bond securities around the world — each as unique as a fingerprint.
As a result, the bond market is also far less liquid than stocks. Setting aside Treasuries and a few other very active government bond markets, probably only about 1-2 per cent of bonds trade at least once day. A decent chunk go for months without any trading activity whatsoever.
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It’s just too hard to try to buy every single bond in whatever index it tracks (often it is actually impossible). Instead, bond ETFs typically do something called “sampling”: fund managers assemble a representative slice of more actively-traded bonds that mimics the index as closely as possible in financial and fundamental terms.
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On any given day, ETF managers publish creation and redemption lists with specific bonds or broader parameters for types of bonds they’ll accept in return for making new shares, or what securities they will give in return for shares handed to them.
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But the result is to make bonds that are a bad fit for ETFs relatively less liquid. “There is an increasing contrast between bonds in ETFs and bonds left behind,” admitted Brett Pybus, the other co-head of fixed income ETFs at BlackRock. “But ETFs haven’t created the problem, they’ve merely accentuated it,” he stressed.
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The overall result is that more parts of the fixed income market are beginning to resemble the stock market — what some insiders have dubbed its “equitisation”. The implication is that the bond market will also become increasingly prone to whiplash moves, and — in extremis — stomach-churningly fast crashes.
And they call it out:
Fear of bond market illiquidity has been such a staple of the post-2008 era that Bloomberg’s Matt Levine for a period even had a semi-regular “people are worried about bond market liquidity” slot in his newsletter. If bond ETFs actually end up solving — or at least ameliorating — this problem, then it would be quite the twist, given that many people have expected them to make it worse.
Isn't part of the appeal of bonds their relative stability in relation to stocks? That seems to me, can only be possible with a low trading volume. Therefore, yes it would be somewhat harder to...
Isn't part of the appeal of bonds their relative stability in relation to stocks? That seems to me, can only be possible with a low trading volume. Therefore, yes it would be somewhat harder to cash out of but thats a feature, not a bug.
Traders favoring the funds built from groups of bonds because they're easier to sell shouldn't be a shock. I dont think people who hold these things long term should worry though, bonds are still serving their intended purpose. Does that sound right?
Bonds are more stable because they are less risky than stocks (until they become junk bonds, but that is a different story) - it has nothing really to do with trading volume. Low trading volume...
Bonds are more stable because they are less risky than stocks (until they become junk bonds, but that is a different story) - it has nothing really to do with trading volume. Low trading volume actually adds additional risks to an asset (in addition to just liquidity risk - i.e. risk of not being able to sell the asset when needed at reasonable price, there is also risk of inefficient price discovery - it is harder to accurately value an asset that trades infrequently) which can make the asset less stable and less desirable.
US Treasuries for example are some of the most stable and least risky bonds, and also the most liquid and frequently traded.
It's probable that this is just ignorance on my part, but this feels uncomfortably close to the whole mortgage bundling kerfuffle that caused the 2008 crash. They're effectively setting up a side...
It's probable that this is just ignorance on my part, but this feels uncomfortably close to the whole mortgage bundling kerfuffle that caused the 2008 crash.
They're effectively setting up a side market of securities that are trading based on how they think the actual security ( the bonds ) is going to move. In the best case, it's just another financial vehicle for the rich to get richer betting on what activity bonds will have. In the worst, it will impact bond prices, which as you say the whole point of them is that they're a stable and safe investment.
Yes, long-term investors who hold bonds to maturity can often ignore market prices in the short term. That’s true of any investment. A homeowner who doesn’t need to sell or a long-term investor in...
Yes, long-term investors who hold bonds to maturity can often ignore market prices in the short term. That’s true of any investment. A homeowner who doesn’t need to sell or a long-term investor in a company’s stock could ignore market prices too.
You can ignore it if you don’t have to sell. But what if you do? Sometimes things change and people need to sell. If the economy goes bad, or they personally have some bad luck, it may turn out that some people want to sell who normally wouldn’t.
So, market prices will matter to anyone, but as a backup plan, rather than as a trade that they actually plan on doing. When their backup plan gets iffy, sometimes people get nervous. More vulnerable, less wealthy people need to worry about backup plans more. Or more leveraged.
The way this happens can be surprising. Banks are traditionally long-term investors that hold bonds to maturity and price them based on accounting conventions assuming that’s what they’ll do. However, after interest rates went up, some investors did the math and realized that certain banks with lots of bonds were technically insolvent, and eventually word got out even to normal bank depositors, resulting in a bank run. Turns out they needed to sell, so the real price was the market price.
Bonds are only relatively stable because the world can change around them. That’s true of any investment. Houses go up or down in price even though the house didn’t change, because the neighborhood changed or the market changed. Context matters, and context is whatever the rest of the world is doing.
(The same is true of CD’s. I hadn’t realized you could sell CD’s early until I started buying them through a brokerage. Turns out they have a market price, too.)
That'd only be the case with highly rated bonds. So called "junk bond" markets exist for a reason - these are the opposite of stable. The difference between a bond and a stock is that a bond still...
That'd only be the case with highly rated bonds. So called "junk bond" markets exist for a reason - these are the opposite of stable.
The difference between a bond and a stock is that a bond still has its yield to fallback on.
A long article that might be summarized as “people are worried about bond market liquidity:”
…
…
…
…
And they call it out:
Isn't part of the appeal of bonds their relative stability in relation to stocks? That seems to me, can only be possible with a low trading volume. Therefore, yes it would be somewhat harder to cash out of but thats a feature, not a bug.
Traders favoring the funds built from groups of bonds because they're easier to sell shouldn't be a shock. I dont think people who hold these things long term should worry though, bonds are still serving their intended purpose. Does that sound right?
Ed: removed a negative
Bonds are more stable because they are less risky than stocks (until they become junk bonds, but that is a different story) - it has nothing really to do with trading volume. Low trading volume actually adds additional risks to an asset (in addition to just liquidity risk - i.e. risk of not being able to sell the asset when needed at reasonable price, there is also risk of inefficient price discovery - it is harder to accurately value an asset that trades infrequently) which can make the asset less stable and less desirable.
US Treasuries for example are some of the most stable and least risky bonds, and also the most liquid and frequently traded.
It's probable that this is just ignorance on my part, but this feels uncomfortably close to the whole mortgage bundling kerfuffle that caused the 2008 crash.
They're effectively setting up a side market of securities that are trading based on how they think the actual security ( the bonds ) is going to move. In the best case, it's just another financial vehicle for the rich to get richer betting on what activity bonds will have. In the worst, it will impact bond prices, which as you say the whole point of them is that they're a stable and safe investment.
As long as the bonds produce the yield, that sets a floor on whatever price the bond will have.
Yes, long-term investors who hold bonds to maturity can often ignore market prices in the short term. That’s true of any investment. A homeowner who doesn’t need to sell or a long-term investor in a company’s stock could ignore market prices too.
You can ignore it if you don’t have to sell. But what if you do? Sometimes things change and people need to sell. If the economy goes bad, or they personally have some bad luck, it may turn out that some people want to sell who normally wouldn’t.
So, market prices will matter to anyone, but as a backup plan, rather than as a trade that they actually plan on doing. When their backup plan gets iffy, sometimes people get nervous. More vulnerable, less wealthy people need to worry about backup plans more. Or more leveraged.
The way this happens can be surprising. Banks are traditionally long-term investors that hold bonds to maturity and price them based on accounting conventions assuming that’s what they’ll do. However, after interest rates went up, some investors did the math and realized that certain banks with lots of bonds were technically insolvent, and eventually word got out even to normal bank depositors, resulting in a bank run. Turns out they needed to sell, so the real price was the market price.
Bonds are only relatively stable because the world can change around them. That’s true of any investment. Houses go up or down in price even though the house didn’t change, because the neighborhood changed or the market changed. Context matters, and context is whatever the rest of the world is doing.
(The same is true of CD’s. I hadn’t realized you could sell CD’s early until I started buying them through a brokerage. Turns out they have a market price, too.)
That'd only be the case with highly rated bonds. So called "junk bond" markets exist for a reason - these are the opposite of stable.
The difference between a bond and a stock is that a bond still has its yield to fallback on.
Mirror: https://archive.is/QoDVM