Corporate bond funds that look shaky have been wobbling harder than stronger-looking bond funds.
Three economists have published data supporting that observation in a new working paper on financial fragility in the corporate bond markets.
Antonio Falato, who’s an economist at the Federal Reserve Board, and two colleagues, Itay Goldstein and Ali Hortaçsu, considered several different bond fund risk indicators, and looked at how those indicators correlate with bond fund asset flows since worries about the pandemic, and pandemic-related economic uncertainty, began squeezing world investment markets.
The economists found that bond mutual funds, and exchange-traded funds that invest in corporate bonds, that seem riskier suffered much more dramatic asset outflows than bond funds and bond ETFs that seem as if they would be more stable.
- A link to the Falato team’s paper is available here.
- A 2020 bond market preview article, posted Dec. 30, 2019, is available here.
Falato and his colleagues have posted the working paper on the website of the National Bureau of Economic Research, in front of the NBER’s usual paywall.
A working paper is an academic paper that has not yet been through a full academic peer review process.
The paper may be of interest to professionals in the life insurance and annuity sectors for two reasons.
One is that life insurers themselves have experimented with investing some of their assets on bond funds.
A second reason is that some life insurers have investment management arms that offer bond funds.
A third reason is that financial professionals who are selling annuities, or life insurance-based retirement planning arrangements, may find themselves competing with financial professionals who promote use of bond funds as retirement savings and retirement income planning tools.
Financial professionals to prefer bond funds to life- and annuity-based arrangements may tell clients that bond funds are better because bond funds give retirement savers easier access to their money.
Falato’s team contends that bond fund liquidity may have its limits.