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Fair enough. Not many DIYers chatting on internet forums appear to have bought gov't bond only ETFs, or have not talked about it. J4B is the only one I know who has been vocal about it here.
 

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AltaRed, I should clarify. I own a lot of XBB inside registered accounts. However in non-reg, I have a portfolio of individual government bonds + GICs, not a bond ETF.

I have not yet checked this (was away) and have no idea how that portfolio has done.

As for XBB, VAB, ZAG, they may be trading away from NAV. If you look at iShares XBB it appears that the NAV is a few percent higher than the market price. So it could be an arbitrage problem and lack of Bay Street support for keeping the share prices accurate, resulting in a discount to NAV. Currently I suspect it's a combination of corps tanking + discount to NAV due to arbitrage failure.

There is precedent for this as exactly the same thing happened to some big American bond ETFs during 2008. So it's not that unusual.

I suspect that people selling XBB, VAB, etc at these discounts are making a huge mistake.

As for the corps inside XBB going bad. Yeah it's possible but the credit ratings were pretty good. VAB was even better. At least we're going to get better yields in that portfolio now, if corporates really are falling that much. But really I still suspect it's at a discount to NAV (take a look at iShares web site). Also let's not lose context here. Even with the current discount to NAV, XBB is +2.3% for 1 year and -1.5% year to date, I think.

Correct for the discount to NAV and that puts XBB positive year to date. That's not a disaster by any measure unless I'm getting something wrong.

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.
OK thanks for mentioning that. So yeah, there is mispricing of these bond ETFs or perhaps different players disagree on the price of the corps inside the portfolios. Becomes very difficult to price these things when the buyers disappear and there are no bids.

Either way, I think it's a huge mistake to sell these during the market turmoil.

To me one of the most shocking movements was in XSB. We all considered this one to be pretty safe, yet it had about 8% drawdown over the last few days. That's really very shocking.

iShares says XSB's NAV is currently 27.80 and the closing price was 26.50 meaning a whopping 4.7% discount to NAV. But then again, if there are no bids in Canadian corporates then how is Blackrock calculating NAV? Are they simply using the last (stale) price?

(As an aside, quickly logging into my own bond portfolio which holds entirely government & CMHC bonds shows a pretty stable value compared to the last values I recorded on March 6.... based on the prices iTrade shows which come from Perimeter Markets)
 

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James:

Do you feel the same way about XSH right now?
My Bay Street contacts tell me that bond ETF pricing cannot be trusted these days. Based on that I would not trade anything meaning I would not place any buy or sell orders on ETFs.

Something is clearly very wrong in the bond market and the bond ETFs are not acting as we expect.

I would not buy or sell XSH until there is more clarity on what its fair value is.
 

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Here's one article I've found on this issue. It's several days old and the dislocation of price has become more severe since this was written. In fact dramatically more severe today:
https://www.bnnbloomberg.ca/bond-etfs-facing-toughest-liquidity-test-yet-in-virus-turmoil-1.1404982

Does anyone else have any other sources they can share?

Here's what I understand of it all:

There have actually been warnings for a while about this kind of a bond ETF problem. Basically the ETF shares themselves are much more liquid than the underlying bonds. Government bonds are very liquid, but corporates are not. And then some market stress hits (like the current emergency) and now the corporate bond market has seized up. As I understand it, the corporate bond market (in many countries) has frozen up, and there's no trading any more.

So the corporate bonds have become illiquid. Now the ETFs have a big problem because normally as people buy/sell the shares on the exchange, the bond holdings are bought & sold along with them. However when you have illiquid underlying bonds, the share prices will -- inevitably -- become disassociated from the market value of the bonds. And selling them creates particularly large price action, downward.

It's somewhat technical and I don't fully understand the process but I think what this article describes might be the mechanics at play right now in things like ZAG. Frankly it's a disaster for these bond ETFs.

Now this is a total guess, as I'm just an amateur at this but I still think this is an ACUTE and temporary problem rather than a long term, permanent value loss. We're now in a credit crisis in corporate bonds and truly wild things are happening. I suspect... again just my guess... that the bond funds are going to be OK long term. I hold a lot of XBB inside my RRSP and I am not selling anything, because I believe that I would be giving away the shares at a big discount to fair value.
 

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Watching my XBB and 5 star bond mutual funds drop so much in value is the thing causing me the most concern during this market mayhem.

I've read about the possible pricing issues, but do people here feel that it is a temporary drop that will normalize over the short term?
 

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Can I ask, which bond mutual fund are you looking at? It's possible mutual funds will be a bit more immune to this effect than ETFs; this might be a consequence of the "ultra liquidity" of ETFs.

Personally I think it's a temporary drop in XBB which will normalize over the medium term (1-2 years) but not necessarily the short term. As XBB investors we should have a time horizon of years, the same as an investor in stock index ETFs.
 

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Can I ask, which bond mutual fund are you looking at? It's possible mutual funds will be a bit more immune to this effect than ETFs; this might be a consequence of the "ultra liquidity" of ETFs.

Personally I think it's a temporary drop in XBB which will normalize over the medium term (1-2 years) but not necessarily the short term. As XBB investors we should have a time horizon of years, the same as an investor in stock index ETFs.
The two funds in question are PH&N Bond Fund and Total Return Bond Fund. It's true that they have not experienced a gigantic downdraft like XBB.

Maybe mutual funds aren't so bad after all.
 

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More evidence that this is an acute phenomenon, liquidation and indiscriminate selling:
https://www.bloomberg.com/news/articles/2020-03-18/all-the-signs-a-cash-crunch-is-gripping-markets-and-the-economy

It’s one thing to see exchange-traded products stuffed full of relatively illiquid corporate bonds trade below the purported sum of the value of their holdings. It’s quite another to see such a massive discount develop in a more plain-vanilla product like the Vanguard Total Bond Market ETF (BND) as investors ditched the product to raise cash despite not quite getting their money’s worth.
I suspect that what we're seeing on ZAG, XBB etc is the same effect as what they describe for BND since these are direct Canadian parallels to BND.
 

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There is an interesting and clarifying post on the Horizons website explaining the bid-ask gap in fixed income. They even offer to help, if you call them directly.

The wider-than-normal bid/ask spreads that we are currently observing are the direct result of the volatility in the fixed income market, where the underlying bonds and other over-the-counter fixed income securities held by ETFs are experiencing very high levels of volatility. These market conditions are forcing the market makers, who subscribe for and redeem units of the ETFs, to increase their hedges against intra-day market volatility.

This is not unique to Horizons ETFs; most of the ETF industry is dealing with much wider-than-normal spreads which are a direct result of this intra-day market volatility and the requirement for market makers to hedge that intra-day market risk.

It is important to understand that while these spreads are most noticeable on fixed income ETF pricing, due to the transparency of ETF pricing, anyone transacting in the over-the-counter fixed income market would likely see even wider bid/ask spreads than what are reflected in these ETF prices.

Notice: Bid/Ask Spreads on Fixed Income ETFs
 

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Thanks fireseeker. Lots of chaos out there.

It's important to remember the VIX hit 85 today. Only a few points shy of the worst levels ever seen in 2008-09.

The VIX will calm down in the short term. And bonds will find a reasonable price. More than likely, equities will remain very low for the next 3-6 months at least. So plenty of time to sell your bonds to buy the stock indexes :)
 

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ZAG bounced back today so far. Was down around 9 or 10% yesterday to 14.02. Now sitting at 15.12. I wonder if some investors saw that it was incorrectly valued and jumped in, or the bid/ask issue got sorted out to some extent.
 

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I've been studying the bond ETF issue including some proprietary notes from Bay Street contacts. I'll briefly share what I learned:

The bond ETFs are not the problem. The problem is the Canadian corporate bond market, including just about all short term paper. The market has been frozen and it's not a Canada-specific problem. The same is happening in the US, though it seems a bit worse in Canada (maybe due to the oil crash).

Many corporate bonds don't trade any more. They have gone "no bid". The prices really are not known... and therefore, one can't trust the published NAV of the bond ETFs either. The NAV is only meaningful with liquid securities. But corporate bonds are no longer liquid... we don't know their price.

So one can't really say that the bond ETF trades at a discount to NAV/fair value. The published NAV is stale and potentially meaningless.

The reason the authorized participants and various market makers don't simply buy up the bond ETF units is... they also don't know what the units are worth! So anyone buying it, buys rather conservatively, and that's why you see the big price drops and the very large bid/ask spread.

A second factor, happening at the same time as all this, is forced liquidation of portfolios. There have been margin calls. In forced liquidation, everything gets sold. And therefore the bond ETF units get sold into that weak/conservative bid, which (in my opinion) probably explains the horrendous drops in price we've seen on the bond ETFs.

Will the prices bounce back? Who knows. I haven't sold any of my XBB units. My sense is that it would be a mistake to sell it while others are getting margin calls and being forced to liquidate.

These are portfolios of bonds meant to be held for the long term.
 

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The shortest bear market in the past few decades has been 3 months. So I think the low is probably not in yet. I think there is a lot of optimism yet to be zapped by the reality of the pandemic.

The bond situation is interesting though. Is it better to eat the poor bid/discount on a bond fund to be able to rebalance into equities? I don't remember bond funds freezing up the same way in 2008, and in many ways, this is less of a financial crisis than that. Is it just that everyone is not in the office to trade bonds? Hiding at the beach house? ;)
 
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