Policy makers also say they’ll avoid buying any ETFs trading with a “material” premium to their net asset value. Though LQD’s premium has come down from its record high of 5% last week, it was still trading 1.6% higher than its portfolio of bonds as of Friday’s close. That could make the Fed wary, according to Tchir.
The strategist also points to the fact that BlackRock itself has been appointed to run the debt-buying programs on behalf of the American authorities. While the potential conflict of interests there aren’t necessarily a dealbreaker, they are a consideration, according to Tchir.
“They might want to restrict some activities so the perception of BlackRock increasing its AUM with taxpayer money is avoided,” he said.
On Friday, the world’s largest asset manager said it would waive investment advisory fees on ETFs it buys on behalf of the Fed, whether they’re issued by BlackRock or others.
Tchir remains skeptical of investment-grade credit even apart from the Fed’s plans, recommending in an email last week that investors short the $38 billion fund. He points to the fact that “price action in LQD has stalled,” and his theory is that investors rotating out of broad-based bond funds will move to equities instead.
Others are more bullish.
“I think buying the likes of LQD -- or even better the underlying bonds, given that LQD now trades at a premium -- makes more sense from a fundamental perspective, given that these spreads are extremely wide and the Fed’s purchasing will support the market,” said Peter Chatwell, Mizuho’s head of multi-asset strategy.
Still Chatwell sees some merit in Tchir’s caution.
“I assumed from the text that the cash bond purchases would be 1-5Y and that the ETF would be LQD et al., but on reflection it could be VCSH and IGSB,” he said, referring to Vanguard’s Short-Term Corporate Bond fund and the iShares counterpart.
--With assistance from Craig Torres.