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  • Writer's pictureJohn Shelburne

(Batsht Crazy Volatility*Higher costs) = Bond ETF discounts

Daily High Yield Volume from TRACE

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".



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.

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!


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.


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 response article also gave good color on the extreme volatility.

“The [BIS] paper suggested some issuers would try to deliver more concentrated baskets. It was actually the opposite,” a period she described as “the mother of all stressed bond markets”.

A Funny Skit

A great skit for SNL would be the immediate reactions on an IB chats or Zoom calls after the BIS published Todorov's paper.

speaker 1 - who the eff is Karamfil Todorov and what foxhole was this clown in while we were trying to stablize the market???? speaker 2 - I think he was getting his PHD at LSE speaker 1 - What...he was where? In school getting his PHD??? That dude wasn't even in the market seeing the carnage!

God that would be such a great skit. Small audience...but hilarious.

Blackrock Responded

Blackrock published a paper (link below and definitely worth a read) that made the BIS paper look like a paper written by ....well....... someone who was not in the arena.

New data behind the bond ETF primary process
Download • 344KB

Makes me want to setup a reminder on Siri to read TR's Man in The Arena speech again.

"It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat."


Bond ETF Daisy Chains

As I watched the madness unfold. I thought - "hey maybe some of these ETFs own ETFs and it all might be connected". So I went to town with a few more visuals and the Sankey diagrams helped me see that yes some bond ETF's own other bond ETFs. That is not good in a 30+ VIX like environment.


1) The allegations of nefarious intentions posed in the BIS paper are absurd and a bit insulting if your a professional in finance.

2) ETFs that hold ETFs of illiquid bonds is probably a bad idea.

The ethics section of the CFA is no joke and most of the individuals managing the large bond ETFs have that charter hanging on a wall in their office or at home.

The financial industry definitely has a population of douchenozzles that will do anything for a buck.

(Come on..who didn't love the Let's Put Some Lipstick on This Pig commercial from Schwab)


The majority of people in finance and especially individuals in asset management roles take a lot of pride in their fiduciary responsibilities.



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