Now, three months later, prices on bond ETFs are largely back in lockstep with their holdings. Without the Fed’s intervention, the two likely would have met -- but only after the underlying credit markets dropped steeply, said Dan Suzuki of Richard Bernstein Advisors.
“If the Fed had not stepped in, who knows how bad it would have gotten in markets and in the overall economy,” said Suzuki, the firm’s deputy chief investment officer. “Had that continued, the NAVs would have probably dropped dramatically to meet the ETF prices which probably would have gone down further had the Fed not stepped in.”
The Fed has purchased $5.5 billion worth of bond ETFs through June 9, a fraction of the facility’s $250 billion capacity. With both bond ETFs and the credit market largely back to business as usual -- companies are issuing debt at a record clip -- questions have emerged about how long the Fed’s purchases will last. The central bank said Monday that it could pause buying once market conditions return to pre-pandemic levels, with the option to resume if the situation worsens.
In the eyes of Miller Tabak’s Matt Maley, the eventual tapering of support could disrupt markets.
“When the Fed buys ETFs they are totally insensitive to price, that’s dangerous,” said Maley, chief market strategist. “When a large price insensitive buyer leaves any market, it leaves it very vulnerable.”
--With assistance from Claire Ballentine.
This article was provided by Bloomberg News.