(Batsht Crazy Volatility*Higher costs) = Bond ETF discounts
I had an interesting position in March of 2020. I had alot of time on my hand because no one was picking up the phone or responding to my email messages.
I was stuck in my home office watching CNBC waiting for a classic Jim Crammer meltdown moment.
Instead of Crammer I had the pleasure of listening to Bill Ackman tell me that "Hell is Coming".
BOND ETF NAV DISCOUNTS
All of the articles about massive NAV discounts kept appearing in my daily reading and I became curious if to see if these journalist actually knew what they were talking about.
The liquidity ‘doom loop’ in bond funds is a threat to the system
Extreme market stress puts $6.4tn ETF sector under acute pressure
Bond ETFs Flash Warning Signs of Growing Mismatch I certainly didn't (and still don't) understand the technicals behind the calculations of NAV for a bond ETF but the underlying securities in illiquid bond ETF's would have to be really interesting to watch over a 10 day period. How do u price a high yield bond in the leisure industry as a virus is spreading around the globe? Soooo....................I hopped on Flourish and found a cool visual that treated the individual bonds in HYG like members of the House of Representatives. Instead of political parties, I setup parties for price bands.
Click on the dates on the visual below to make the chart move
It's not Gamestop volatility but WOW! Those are some price movements!
WHY BRING IT BACK UP
So I am bringing this visual back b/c of an article I recently read in the FT "Bond ETFs might have short changed market makers during 2020 panic" . A recent ETF arbitrage BIS paper suggested that issuers shortchanged market makers by delibertley using lower quality bonds in order to discourage share redemption.
WHAT! ARE YOU SERIOUS! TELL ME WHAT WAS HIGH QUALITY AFTER PLAYING WITH THAT VISUAL. NAMES WERE MOVING FROM 90 TO BELOW 50.
John Holliyers quote in the FT article was a bit more professional:
“the presence of bond ETF discounts during this period was primarily a reflection of the higher costs and uncertainty in bond markets and was not a barrier to the arbitrage mechanism that underlies creation and redemption”.
Translating this statement in my small brain: (Batsht Crazy Volatility*Higher costs) = Bond ETF discounts
Samara Cohen's quote in the