These are the two statements you most often hear about liquidity and ETFs:
- ETFs are only as liquid as what they own.
- ETFs are only as liquid as what you see on the screen.
Both of these are fundamentally flawed, and interact in interesting ways. And nowhere are there more histrionics about these issues than junk bonds and their ilk (say, bank loans).
The hand-wringing seems to be coming back in vogue, as articles start popping up about the looming crisis in corporate debt (say, these comments from Greg Lippmann at LibreMax) or Scott Minerd from Guggenheim (who’s both extremely bearish and a lot smarter than I am) suggesting at the Milken conference this week that everyone pull their money from bank loan ETFs because of liquidity issues.
So what’s the truth here? Like most things, it’s complicated.
First, let’s get one thing out of the way—the bond market’s pretty darned big.
All told, the current outstanding U.S. debt is just about $40 trillion—or $10 trillion more than the entire U.S. equity market.
The red bars at the bottom there are corporates. Importantly, the percentage of outstanding debt that is corporate just doesn’t vary much. In 1980, 21% of outstanding debt was corporate. Today 21% is corporate. At the peak, in 1981, it hit 22%. At its lowest—when prices got destroyed in the financial crisis, and the Treasury issued enormous volumes—it slid as low as 18%. None of that says whether any of this debt is good or bad, or cheap or expensive. It’s just what it is.
And while the daily trading was having a hard time keeping up, the reality of the past 15 years is that, for the most part, daily trading in corporates has stabilized at around 0.35% of the outstanding trading on a given day.
Of course, there are huge “haves” and “have nots” in there. CVS bonds may trade like water, but there are huge swaths of the market that might not trade at all on a given day. And therein lies the rub: how you think about what happens to big baskets of bonds on a day when everyone wants to sell.