Sage's Smith: Cool It, Bonds Will Be Fine

July 27, 2017

Inside ETFs: Let’s hit another hot-button issue: Is there anything about the massive flow into passive products or the rush of flows into passive products that worries you at all?

Smith: The worries about passive products are clearly more a concern on the equity side than they could ever be on the fixed-income side, with the exception of maybe a couple of asset classes, like high yield. Nobody sits there and says, “Oh my god, AGG is completely overwhelmed by all this passive investment; it's going to blow up!” It just doesn't happen.

That's different than perhaps many of the sectors in the equity market; let's say, tech or financials. In fixed income, we don't have those kinds of sector subsets where five stocks will dominate from a fixed-income perspective.

There aren’t five bond issuers that are going to dominate and therefore control all the flows and have a vast shadow of influence over price action within any given group of ETFs. That just doesn’t exist in fixed income.

There is a knock-on effect, I will give you that, in the sense that if things start to go wrong and markets start to go awry, the world tends to live in a matrix, and there are relational effects to all of that.

So if things go wrong in the equity market, and liquidity starts to perhaps be less than what one would feel is optimal, you might see a knock-on effect in some of the high-yield sectors or the more exotic credit areas of the fixed-income market, including those that have a high degree of correlation to equity asset classes, convertibles being another area, perhaps preferred stocks.

It's not there yet, but those relationships and those kinds of correlations are things that we study quite a lot between fixed income and the equity asset classes.

Inside ETFs: We look forward to hearing more about it at Inside Fixed Income.

 

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