Bond ETFs tumble amid Covid-19 crisis

Some investors increasingly believe that 'cash is king'


The market-wide sell-offs triggered by the Covid-19 virus infecting the global economy have severely affected exchange-traded funds (ETFs), with Bond ETFs particularly suffering.

The usual inverse relation between bonds and stocks have broken in recent weeks, with investors increasingly sceptical of the ability of bonds to prop up portfolios.

With an oil price war, a disruption in global supply chains and the effective lockdown of most of western Europe and the United States looming, one would expect investors to flock to this traditional safe haven.

While the yields on both the 30- and 10-year US Treasuries did sink to record lows in recent weeks, in the past few days both have gained. The 10-year has risen to above 1.2 per cent while the 30-year has more than doubled.

Investors have rushed to sell global bonds, believing instead that "cash is king". Other traditional safe havens have witnessed similar trends. Gold for instance has fluctuated wildly as financial institutions cover up losses incurred elsewhere by liquidating the yellow metal.

ETFs have grown in popularity in recent years. The simultaneously targeted and diversified nature has proved attractive to investors as they can contain a basket of securities, from stocks, commodities or bonds while tracking a certain index or investment criteria.

Following a decade or more of historically low interest rates, assets held by ETFs have surged to around $6tn (£5.1tn, €5.5tn), with bond ETFs accounting for up to a sixth of the overall market.

The uncertainty of recent weeks has sparked a growing gap between the market price and the net asset value of bond ETFS. According to a Reuters study, some of the largest bond ETFs in Europe are witnessing an average gap of 2-11 per cent. BNP Paribas’s euro aggregate treasury bond fund (JBEM) and the iShares core European government bond ETF (EUNH) have seen the widest disparities.

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FURTHER READING: ECB launches €750bn bond-buying stimulus to help economy through Covid-19

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