Canadian Money Forum banner

1 - 20 of 35 Posts

·
Registered
Joined
·
37 Posts
Discussion Starter #1
I invested heavily in two bond funds in December thinking they would be low-risk compared to the overpriced market. I then sold them on March 9th when it was pretty clear that investors were just putting money into bonds to get out of the market. So far so good.

However both of these funds dropped by 4-5% today. Much better than the rest of the market, but still a significant decline for bonds. Interest rates hadn't changed, dividends weren't announced etc. I'm assuming this was just due to investors panicking and pulling out everything to cash.

BMO Discount Bond Index ETF (ZDB.TO) and Vanguard Canadian Aggregate Bond Index ETF (VAB.TO)

I'm considering buying back in tomorrow (for bonds) just because they offer a slightly better return than cash. But the risk still seems relatively high.

I'm not a bond expert by any means. Was the drop in value today a reflection of risk that some of the companies will default on their bonds?
 

·
Registered
Joined
·
912 Posts
The credit quality w VAB is fine. I just think it is buying and selling and maybe a little liquidity. There was a ton of buying in these ETFs earlier this month. I looked at XBB. ~ 1.4M shares bought Mar 2, price rose 5%. In the last 2 days there has been a lot of selling ~ .8M and the price fell back about the same amount.

Gold also fell ~ $100 from its earlier peak or ~6.5%. People selling to cover margin?
 

·
Registered
Joined
·
9,930 Posts
Check closing prices of today versus the posted NAV for those bond ETFs today off the BMO and Vanguard websites. I am guessing you will find some disturbing spreads between Closing prices and NAV. If I am correct, there are a few reasons for that:

1. Significant mis-match in Bid vs Ask resulting in a spread that should be corrected for the most part by the market makers. Market makers are supposed to intervene to close the gap by creating or destroying ETF units as necessary to keep the spread narrow. If it has gotten wide, then the market maker is MIA, either on purpose, or could not keep up.

2. Articles from various sources are suggesting there is stress in the bond market, primarily in corporate bonds, but even Treasuries. That might mean it is impossible to 'find' a representative NAV for certain bond issues and the market maker cannot respond appropriately. Corporate bonds, especially BBB bonds may well be stuck, with no Bids and are priced closer to junk. There is reason to believe that lowest investment grade corporate bonds are worth only cents on the dollar right now.

Bottom line: It is pretty risky trying to buy/sell bond ETFs right now, and especially corporate bond ETFs. They are the first to go a bit wacko in a 'free for all' market. Personally, I won't touch/own a corporate bond ETF because of the points I just listed... lack of liquidity and/or mis-pricing in challenging times. I'd suggest anyone with corporate bond ETFs to simply stay put until the market settles down.
 

·
Registered
Joined
·
2,638 Posts
Although interest rates are dropping, inflation potential is dropping far faster. It's not exactly going to be expensive to buy anything when no one is buying anything. There could even be deflation. That's not good for gold. At the very least, concerns will limit upside.
 

·
Registered
Joined
·
912 Posts
A Bloomberg analyst was showing a chart on BNN that showed that cash was flowing right out of gold into $US (cash). Maybe the same w bonds.
 

·
Registered
Joined
·
3,120 Posts
Check closing prices of today versus the posted NAV for those bond ETFs today off the BMO and Vanguard websites. I am guessing you will find some disturbing spreads between Closing prices and NAV. If I am correct, there are a few reasons for that:

1. Significant mis-match in Bid vs Ask resulting in a spread that should be corrected for the most part by the market makers. Market makers are supposed to intervene to close the gap by creating or destroying ETF units as necessary to keep the spread narrow. If it has gotten wide, then the market maker is MIA, either on purpose, or could not keep up.

2. Articles from various sources are suggesting there is stress in the bond market, primarily in corporate bonds, but even Treasuries. That might mean it is impossible to 'find' a representative NAV for certain bond issues and the market maker cannot respond appropriately. Corporate bonds, especially BBB bonds may well be stuck, with no Bids and are priced closer to junk. There is reason to believe that lowest investment grade corporate bonds are worth only cents on the dollar right now.

Bottom line: It is pretty risky trying to buy/sell bond ETFs right now, and especially corporate bond ETFs. They are the first to go a bit wacko in a 'free for all' market. Personally, I won't touch/own a corporate bond ETF because of the points I just listed... lack of liquidity and/or mis-pricing in challenging times. I'd suggest anyone with corporate bond ETFs to simply stay put until the market settles down.
Yes. Checked XBB today because I thought the drop to $31.52 yesterday was a little weird. Its NAV this morning is $32.77, almost 4% higher. I feel bad for the dude that sold it at the end of the day yesterday.

That said, be careful with bond ETFs people. I don't know why Blackrock is dropping the ball on this. Most likely due to a quickly moving market with wildly changing bid/ask prices. I suppose you can't expect Blackrock to take a loss for just providing liquidity, but it does take away one of the superior benefits of ETFs over closed end funds.
 

·
Registered
Joined
·
2,638 Posts
This is not a problem with just ETFs. Bonds are illiquid markets and thinking you can run for the exits in Canadian bonds is not going to end well if a million other people are doing the same thing.

Even US treasuries have been under pressure, thus the inject of trillions of liquidity. But for the most part, if you want bonds you can liquidate in a crisis, you will have to go to US treasuries.

Look at the volume on TLT - 24M at $157 vs XBB: 433k at $31. 3.7T vs $13B - almost 300 times the cash volume.
 

·
Registered
Joined
·
2,872 Posts
For those who have to draw down portfolio for regular living expenses, then it would likely make sense that they draw from their bond etfs. Perhaps managed funds that hold those same etfs, might do the same? Either way could reduce market prices.

Our fixed income is mainly in actual bonds. They have dropped slightly, presumably because of increased risk of default. Same with our split preferreds - not down much, but risk increased as the equity side plummets.

I don't own bond etfs or other etfs that include them. Bonds we own may not be very liquid, but we have no need to sell them (Yet??)
 

·
Registered
Joined
·
318 Posts
The liquidity pressure could also have been investors selling off bond funds to buy equity on sale. Rebalancing is looking very attractive right now.

Also panic selling of everything from people who don't know better. It's normal for the markets to be weird with everything going on.
 

·
Registered
Joined
·
9,930 Posts
Yes. Checked XBB today because I thought the drop to $31.52 yesterday was a little weird. Its NAV this morning is $32.77, almost 4% higher. I feel bad for the dude that sold it at the end of the day yesterday.

That said, be careful with bond ETFs people. I don't know why Blackrock is dropping the ball on this. Most likely due to a quickly moving market with wildly changing bid/ask prices. I suppose you can't expect Blackrock to take a loss for just providing liquidity, but it does take away one of the superior benefits of ETFs over closed end funds.
I understand bond ETFs sponsored by Vanguard and BMO (and probably others) have the same market vs NAV mis-pricing. There is going to be mis-pricing in times of crisis, whether ETFs, mutual funds, or individual bonds. There were essentially no Bids for corporate bonds earlier this week in any of the brokerage inventories.
 

·
Registered
Joined
·
323 Posts
Could also be due to margin calls, only heaven knows how short margin investors are right now....

Corp bonds are all gonna pay a price..... or should I say their owners will.....
 

·
Registered
Joined
·
33 Posts
The same thing happened to my BMO ZAG.. Thought it would be a safe haven, and it even ramped up pretty good at the start of the TSX downswing.. I am just going to hang on, I guess....
 

·
Registered
Joined
·
9,930 Posts
The same thing happened to my BMO ZAG.. Thought it would be a safe haven, and it even ramped up pretty good at the start of the TSX downswing.. I am just going to hang on, I guess....
Well, of course hang on. Some normalcy will come back to the corporate bond market AND ETF market makers will close the gap between market pricing and NAV. Too many folks think bond ETFs are where you store money to take advantage of equity opportunities in bear markets. Far from it. Bonds reduce volatility in a portfolio over a period of time as in weeks and months, not hours and days. Cash is what one uses to take quick advantage of equity opportunities.
 

·
Registered
Joined
·
33 Posts
Well, of course hang on. Some normalcy will come back to the corporate bond market AND ETF market makers will close the gap between market pricing and NAV. Too many folks think bond ETFs are where you store money to take advantage of equity opportunities in bear markets. Far from it. Bonds reduce volatility in a portfolio over a period of time as in weeks and months, not hours and days. Cash is what one uses to take quick advantage of equity opportunities.
Yes, I will hang on. Thx. Because ZAG is mostly long term bonds (federal and Provincial) and some corporate bonds, wont ZAG seem more attractive to investors if there are more rate cuts, just because the holdings were already bought at a higher rate?? Or does it not work that way? I guess I am asking, in a vacuum, what happens to a long term bond fund when rates go down?
 

·
Registered
Joined
·
175 Posts
Indeed, strange to see so many rate cuts yet my VAB.TO holding is down over 7% in the last few weeks. Nothing is being spared in this sell off!
 

·
Registered
Joined
·
323 Posts
Well BoC and the Fed have announced various different models to increase funding that will help the flow of cash to increase liquidity, a large part was through the bond market, I have to wonder if the drop in the bond market isn't partly effected by the lack of liquidity and thus the dropping prices... with the new measures in place it will return to normal ops IMHO, it will just take a bit of time to get there...

Yes I would say that Bonds shouldnt drop with dropping rates unless there is a liquidity problem, but it sounds like that has been addressed, now its just that people have all this on their minds....
 

·
Registered
Joined
·
9,930 Posts
Any bond ETF that contains corporate bonds is being sold off below NAV,

The issue is primarily corporate bonds and that is a simple market supply/demand issue. Nothing to do about liquidity. Corporate bonds carry an interest risk premium because they are not as safe as government bonds. At the BBB level, they border on junk. Nothing new about that.

Just that almost no one ever wanted to buy a 'government issue only' bond ETF
 
1 - 20 of 35 Posts
Top