Exchange-traded funds are playing a more significant role in US fixed income markets, particularly the corporate high yield segment, according to a Fitch Ratings report.
Although US corporate bond ETF assets total less than two per cent of the US corporate bond market, their influence on trading activity is relatively more significant. Average daily trading volumes (on a weekly basis) for the five largest high-yield corporate bond ETFs more than tripled from about USD470m in early May to more than USD1.5bn in early June.
This ramp-up in trading activity points to the value of ETFs for investors to rapidly enter and exit fixed income positions during a period of market turbulence. However, Fitch also notes that increased ETF trading volumes might also amplify overall bond market volatility, as redemptions of ETFs can, in turn, drive selling in the underlying bonds. For context, Federal Reserve Bank of New York research indicates that an investor or dealer liquidation of more than USD250m in corporate bonds in one day could begin to adversely affect corporate bond prices.
The prominence of ETFs within US fixed income markets, particularly corporates, has increased with the reductions in dealer inventories of corporate bonds. This coincides with new US and global financial regulations that have or will increase capital and liquidity requirements on bank trading activities.
