The September issue of Crane Data's Bond Fund Intelligence, which was sent out to subscribers Friday, features the lead story, "ICI vs. Bank of England: Debate Over Bond Fund Runs," which reviews a study and rebuttal on the susceptibility of bond funds to runs. BFI also includes the "profile" article, "Payden Global Low Duration: Talk w/Syal, Manis, Marshall," with Payden & Rygel Managing Principal Mary Beth Syal. In addition, we recap the latest Bond Fund News, which includes briefs on mixed yields and higher returns in August, continued inflows and more. BFI also includes our Crane BFI Indexes, averages and summaries of major bond fund categories. We excerpt from the September issue below. (Contact us if you'd like to see a copy of our latest Bond Fund Intelligence and BFI XLS data spreadsheet, and watch for our latest Bond Fund Portfolio Holdings data next week.)
Our lead Bond Fund Intelligence story says, "The Bank of England published a study recently entitled, "Simulating stress across the financial system: the resilience of corporate bond markets and the role of investment funds," which explains, "The paper that follows seeks to model how the aggregate behaviour of several sectors within the system of market-based finance, including investment funds and dealers, could interact to spread and amplify stress in corporate bond markets. That focus stems from the growing importance of bond markets to the financing of the economy, alongside the rapid growth in holdings of such bonds in fund structures."
It continues, "The BoE writes, "The stress simulation indicates that, under a severe but plausible set of assumptions regarding market participant behaviours, investor redemptions can result in material increases in spreads in the corporate bond market and, in the extreme, in corporate bond market dislocation, threatening the stability of financial markets and institutions. While such market dislocation is a 'tail risk', the probability of it crystallising could increase, especially if the potential demand for liquidity, including that arising from the investment fund sector, continues to grow relative to the supply of liquidity by dealers and other investors."
The piece explains, "ICI wrote a response, "Simulating a Crisis." Economist Sean Collins explains, "The Bank of England (BoE) recently published a paper detailing results from a simulation intended to "stress-test" open-end investment funds. The paper suggests that under "severe but plausible" assumptions, investors could redeem so heavily from open-end investment funds (e.g., mutual funds or UCITS funds) during a period of market stress that they could cause "dislocations" in corporate bond markets."
ICI adds, "As we have pointed out before, the hypothesis that investors in stock or bond funds might redeem heavily during a market downturn -- thus destabilizing financial markets -- is an old one, dating back to the '20s. We've also noted that there isn't much evidence of this, and that there is a fair bit of evidence against it."
The latest BFI also says, "This month Bond Fund Intelligence "profiles" the Payden Global Low Duration Bond Fund, and interviews Payden & Riegle's Managing Principal Mary Beth Syal, Senior VP Larry Manis and VP Amy Marshall. The three discuss "going global" in the short-term space, and also address the benefits of low duration, as well as a number of topics. Our Q&A follows."
BFI says, "Tell us a little bit about your history." Syal answers, "Payden & Rygel is pioneer in a lot of different things, but one of these was global fixed income investing. Our very first mutual fund was our Global Fixed Income Fund in 1992. There was only, as far as we knew, one other global fixed income fund at that time. But we were a pioneer in looking at global opportunities as being an important element to a fixed income portfolio, so we've always had a global focus."
She continues, "Then we started the Global Low Duration in 1996, couple of years after the first one but part of the second wave. I've been at Payden & Rygel for 26 years and have been steeped in the short duration investment process philosophy for a very long time.... You've got a group of analysts and research folks that are focused on both the advanced economies as well as the emerging economies. We use the resources of the firm broadly when we are looking at the short maturity part of those markets." (Watch for more excerpts of this article later this month, or ask us to see the full issue of BFI.)
Our Bond Fund News includes a brief entitled, "Yields Mixed in August; Returns Up." It says, "Yields dipped most of our Crane BFI Indexes last month, except for the ultra-short segments. Returns were again higher for most market sectors. The BFI Total Index averaged a 1-month return of 0.57% and gained 2.15% over 12 months. The BFI 100 had a return of 0.59% in August and rose 2.68% over 1 year. The BFI Conservative Ultra-Short Index returned 0.17% and was up 1.16% over 1-year; the BFI Ultra-Short Index had a 1-month return of 0.20% and 1.61% for 12 mos. Our BFI Short-Term Index returned 0.27% and 1.84% for the month and past year. The BFI High Yield Index increased 0.16% in August and is up 7.20% over 1 year."
The new issue also includes a News brief entitled, "Schwab Liquidates BFs." It tells us, "A statement entitled, "Liquidation of Schwab Short-Term Bond Market Fund (SWBDX) and Schwab Total Bond Market Fund (SWLBX)" says, "At a meeting held on April 19, 2017, based on a recommendation by Charles Schwab Investment Management, Inc. (CSIM), the Board of Trustees reconsidered its previous decision regarding the reorganization of Schwab Short-Term Bond Market Fund into Schwab Short-Term Bond Index Fund and the reorganization of Schwab Total Bond Market Fund into Schwab U.S. Aggregate Bond Index Fund and approved the liquidation of each of the Schwab Short-Term Bond Market Fund and Schwab Total Bond Market Fund."
Finally, the September issue of BFI also includes a sidebar, "Bond Inflows Keep Coming." It says, "ICI's "Combined Estimated Long-Term Fund Flows and ETF Net Issuance" as of Sept. 13 tells us, "Bond funds had estimated inflows of $6.46 billion for the week, compared to estimated inflows of $5.35 billion during the previous week. Taxable bond funds saw estimated inflows of $5.93 billion, and municipal bond funds had estimated inflows of $527 million." Over the past 5 weeks through 9/13, bond funds and ETFs have seen almost $31.0 billion in inflows vs. $38.0 billion in inflows over the prior 5-weeks."
