[WSJ: Vanguard and Other Bond Fund Liquidity Issues]

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skepticalobserver
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[WSJ: Vanguard and Other Bond Fund Liquidity Issues]

Post by skepticalobserver » Tue Sep 22, 2015 7:35 am

Of interest is today's WSJ article (Bond Funds Push Limits) wherein it is noted that two of Vanguards' bond funds, High-Yield Corporate and Long-Term Investment Grade, hold a whopping 40% and 39%, respectively, of paper that is "lightly traded." Or, less politely put, difficult to sell (and price) for redemptions.

Whither duration?

Sidney
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Re: Liquidity Anyone?

Post by Sidney » Tue Sep 22, 2015 7:45 am

Here is a link to the article

http://www.wsj.com/articles/the-new-bon ... 1442877805

even short term and intermediate term IG have pretty high percentages.
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Boglenaut
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WSJ: Vanguard and Other Bond Fund Liquidity Issues

Post by Boglenaut » Tue Sep 22, 2015 8:18 am

Thw WSJ had an interesting article about Bond Fund Liquidity, including Vanguard and Fidelity Index funds.

http://www.wsj.com/articles/the-new-bon ... 1442877805
Last edited by Boglenaut on Tue Sep 22, 2015 8:24 am, edited 1 time in total.

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Re: WSJ: Vanguard and Other Bond Fund Liquidity Issues, Especially High Yield

Post by linenfort » Tue Sep 22, 2015 8:21 am

Thanks for that!
The chart is especially revealing.
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Boglenaut
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Re: WSJ: Vanguard and Other Bond Fund Liquidity Issues

Post by Boglenaut » Tue Sep 22, 2015 8:30 am

You can actually filter by fund to specific bond holdings' liquidity in that fund. That tool is at the end of the article.

If the entire article does not show, just Google the title and it should.

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Re: WSJ: Vanguard and Other Bond Fund Liquidity Issues

Post by simplesimon » Tue Sep 22, 2015 8:43 am

Thanks for the article. I was a little surprised by where Vanguard Short-Term Investment Grade placed relative to Intermediate-Term Investment Gradem but it tells us which bonds Wall Street is favoring right now. I would be interested in seeing if somebody can figure out how much "illiquidity" translates into losses.

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WSJ Article on Bond Fund Liquidity

Post by hirlaw » Tue Sep 22, 2015 9:27 am

I would be interested to get everyone's thoughts on this article:

http://www.wsj.com/articles/the-new-bon ... 1442877805

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Re: WSJ Article on Bond Fund Liquidity

Post by cfs » Tue Sep 22, 2015 9:28 am

Duplicate.

Already discussed here: viewtopic.php?f=10&t=174254&newpost=2631399
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hirlaw
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Re: Liquidity Anyone?

Post by hirlaw » Tue Sep 22, 2015 10:01 am

I saw this article too and am a little concerned.

Because the large majority of the funds' assets don't fall under the illiquid category, my guess is that the fund manager would sell the more liquid bonds (treasuries, AAA corporates, etc.) to meet redemptions.

I suppose that if us fundholders ride out the temporarily volatility (i.e., don't sell), you will be generally OK in the long term.

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Some Vanguard bond funds "illiquid"?

Post by nbseer » Tue Sep 22, 2015 12:33 pm

Article in today's Wall Street Journal seems to imply that some very popular Vanguard bond funds are "illiquid" and could be at risk if subject to sudden large redemptions??

http://www.wsj.com/articles/the-new-bon ... 1442877805

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Re: Some Vanguard bond funds "illiquid"?

Post by Call_Me_Op » Tue Sep 22, 2015 12:36 pm

Can't read the story. Which funds?
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Re: Some Vanguard bond funds "illiquid"?

Post by hirlaw » Tue Sep 22, 2015 12:47 pm


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Re: Some Vanguard bond funds "illiquid"?

Post by Artsdoctor » Tue Sep 22, 2015 12:49 pm

It's not that the funds are illiquid, it's that the bonds within the fund can be difficult to sell. These "illiquid" holdings are as you'd expect: junk bonds and investment-grade corporates, with junk bonds being usually at the top of the list. This has been written about a lot within the past several months, and shouldn't come as a big surprise. If there is rush to exit funds, managers will inevitably have to sell some of their holdings. Junk bonds and corporates are inherently more difficult to sell so you'd see relatively steep losses if there were a mass exit. If you have a fund with a significant mix (such as Total Bond), the more "illiquid" holdings make up a much smaller component of the fund so there'd be more of a buffer. Muni funds haven't been discussed in the same degree of detail but you'd suspect that they'd be somewhere between corporates and governmental issues.

Larry Swedroe has actually discussed this very topic in his books years ago.

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Re: Some Vanguard bond funds "illiquid"?

Post by saltycaper » Tue Sep 22, 2015 12:52 pm

Call_Me_Op wrote:Can't read the story. Which funds?
The article is talking about infrequently traded corporate bonds. Vanguard's high-yield corporate and Vanguard's short-, intermediate-, and long-term investment grade made their list of large bond mutual funds that have a significant portion of their holdings that might be difficult to sell within 7 days.

I'm guessing Vanguard's pure corporate bond funds would be subject to similar issues and are not on the list only because they are smaller funds.
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Re: Some Vanguard bond funds "illiquid"?

Post by saltycaper » Tue Sep 22, 2015 12:55 pm

Artsdoctor wrote:Larry Swedroe has actually discussed this very topic in his books years ago.
I believe this is where I first read about the issue, which motivated me to separate my corporate and government bond funds.
Quod vitae sectabor iter?

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Re: Liquidity Anyone?

Post by nisiprius » Tue Sep 22, 2015 1:14 pm

And in related news, a correspondent has pointed out this very germane article:

Mutual Funds Face New U.S. Rules for Preventing Investor Runs
A hallmark of the $18 trillion mutual-fund industry is that it promises easy entry and exit for investors. U.S. regulators now want new protections to ensure that pledge can be met due to concerns that firms have loaded up on hard-to-sell assets.
The five-member Securities and Exchange Commission voted unanimously to pass a measure Tuesday... The SEC’s proposal follows warnings from the Federal Reserve and International Monetary Fund that some funds could struggle to meet investor redemptions during a market rout....

Under the proposal, funds would have to maintain a minimum cushion of cash or cash-like investments that can be sold within three days. Funds also could charge investors who pull their money on days of elevated withdrawals.
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Re: Some Vanguard bond funds "illiquid"?

Post by LadyGeek » Tue Sep 22, 2015 5:14 pm

FYI - I combined skepticalobserver's, Boglenaut's, hirlaw's, and nbseer's threads into here. The software sorts by time so, skepticalobserver is first. I picked the best title and retitled the thread.
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Boglenaut
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Re: [WSJ: Vanguard and Other Bond Fund Liquidity Issues]

Post by Boglenaut » Tue Sep 22, 2015 5:29 pm

Bummer! I thought I was first. I did not see skepticalobserve's thread when I searched before posting. :oops:

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Kevin M
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Re: [WSJ: Vanguard and Other Bond Fund Liquidity Issues]

Post by Kevin M » Tue Sep 22, 2015 6:27 pm

A Vanguard article on the topic: Weighing the concerns about bond market liquidity

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Levett
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Re: [WSJ: Vanguard and Other Bond Fund Liquidity Issues]

Post by Levett » Tue Sep 22, 2015 6:52 pm

"In short, I think the concerns are a bit overblown."

What else would you expect a Vanguard spokesperson to say when so many billions of assets in two bond funds may be at risk?

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Re: [WSJ: Vanguard and Other Bond Fund Liquidity Issues]

Post by lack_ey » Tue Sep 22, 2015 7:02 pm

Kevin M wrote:A Vanguard article on the topic: Weighing the concerns about bond market liquidity

Kevin
I notice that Greg Davis actually mentions the "redemption in kind" option for mutual funds. I think some here have speculated that this is not really a feature that is in practice used but more a theoretical construct that could be applied in an emergency, but it seems like day-to-day business in fact.
When a large client wants to redeem, we work with them in order to ensure the least amount of disruption to the portfolio. For example, we have the ability to "in kind" large redemptions. If a client wants to sell a large amount out of a fund, we have the option to either give the client cash, which means selling securities to raise that cash, or give the client a slice of the portfolio's holdings, which the client could then sell. In some instances, we've done the selling for our clients, but in a separate account away from the fund to protect existing fund shareholders from the accompanying transaction costs.

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