Bond ETFs Survived 2020 Liquidity Scare. But Just Barely.
The worst-case scenario came to pass last year. Without the Fed’s intervention, things could have gotten even scarier.
Jerome Powell saved the day.
Photographer: Daniel Acker/Bloomberg
You don’t need to be an expert in financial market structure, nor in fixed-income investing, to understand that an “illiquidity doom loop” is a very bad thing.
This phrase made its first appearance in a Bloomberg News article on Friday, March 20, when Mizuho International Plc’s Peter Chatwell raised the alarm about certain exchange-traded funds tracking the bond markets. By that point, I and others had flagged some of the most extreme cases of ETF share prices deviating from their net asset values. Chatwell’s concern was that with widespread fear gripping the financial world, investors rushing to redeem ETFs would cause forced sales of the underlying bonds at sharply lower prices, which would cause the ETFs to tumble further, which would hasten an exodus from the funds. And on and on it would go, until some ETFs imploded.