NEW YORK--(BUSINESS WIRE)--Recent turmoil in the high-yield bond market and the reported suspension of redemptions of Third Avenue and Stone Lion funds have heightened investor concern about secondary bond market liquidity. A Fitch study of 2015 trading frequency patterns among holdings of high-yield exchange traded funds (ETFs) indicates that issue size and ratings were important factors influencing high-yield bonds' liquidity.
Volatility during the last few weeks has raised questions about the potential for liquidity problems in the high-yield market to spread further. This volatility resulted in outflows from high-yield mutual funds and ETFs. Markets may anticipate even more price volatility into 2016 if US interest rates continue to rise as expected. Fitch's analysis of trading frequency, issue size and credit quality among high-yield ETFs' holdings during 2015 seeks to address these questions quantitatively.
Fitch's analysis of the bonds held by ETFs found that bond issue size and credit quality strongly influenced how often they were traded. Fitch analyzed the trading frequency of 1800 bond issues held by the 24 US-based high-yield bond ETFs from Jan. 2, 2015 to Dec. 15, 2015 as a proxy for the overall high-yield bond market. The ETFs had combined assets of approximately $34 billion, according to Bloomberg data. Issues that were not FINRA TRACE eligible were excluded from the study.
Larger issues with higher credit quality traded more frequently, while smaller, lower quality issues traded less. For example: 'CCC+' and lower rated issues between $250 million to $500 million traded on approximately 50% of the trading days in 2015. 'BB-'and higher rated issues with an issue size greater than $1 billion traded on almost 90% of these days. To put this activity in context, relative to the 2008-2009 period, 2015 was largely marked by moderate volatility and an absence of major liquidity disruptions. The study relied on data from FINRA TRACE and Bloomberg Composite ratings.
On average, only 13% of fund holdings studied fell into the 'CCC+' or lower category, where spreads have widened to their highest levels since the crisis, according to Bank of America Merrill Lynch. The average rating distribution of HY ETF holdings is as follows: 45% 'BB-' or higher, 40% 'B+' to 'B-', 13% 'CCC+' or lower and 3% with no data.
The original issue size distribution of HY ETF holdings is as follows: 3% less than or equal to $250 mil, 25% $251-500 mil, 34% $501-1000 mil, 36% greater than $1,000 mil, and 1% no data.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
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