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Natixis Says ETFs Could Be the First to Fall If a Bond Selloff Flares

  • Growing credit-linked ETFs magnify risk due to illiquid assets
  • Debt ETFs February inflows slow to $3.5b vs $12.6b in January

Passively managed fixed-income exchange-traded funds may become victims of their own popularity should investors ditch them in the face of hardening U.S. Treasury yields.

Flows into such products are showing signs of fatigue since the rout in Treasuries seen at the start of the year, and a flare up could spur a rush for exits, according to Natixis Asset Management, which held €324.5 billion ($400 billion) at the end of December.

“We are seeing more and more credit-linked ETF products, which could be dangerous as the underlying assets are not that liquid,” Ibrahima Kobar, Paris-based deputy chief executive officer, said in an interview in Hong Kong last Friday. Loan funds that pay a premium to compensate for poor liquidity are the riskiest, he said. “The numbers of ETFs are growing every day, creating risks we’ve never seen before.”

Losing Appeal

Global fixed-income ETFs saw a big drop in inflows last month

Source: Morningstar Inc.

The sell-off in U.S. Treasuries has stalled this month after yields looked set to hit 3 percent for the first time in over four years. Yet, inflows to fixed-income ETFs slowed in February to $3.5 billion from $12.6 billion in January, according to Morningstar Inc. In 2017, the funds took in a net $159 billion, the data show.

Kobar joins a chorus of investors who’ve said that the recent market declines and the surge in volatility were driven in part by the growing popularity of ETFs.

“When there’s big noise but no market to take the sell, it will spur panics among investors," he said.

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