Kumar Venkataraman

Professor of Finance, Cox School of Business

Southern Methodist University

SEC FIMSAC: 

A survey of academic research on Bond Funds during the Covid pandemic 
Do Bond funds pose a risk to financial market stability?

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Significant growth in Assets Under Management by bond 

mutual funds and ETFs in the last decade.

Low interest rates have pushed bond funds to ‘reach-foryield’ by holding less liquid assets.

Post-crisis banking regulations have reduced dealer capital 

for market making.

Concern

Large investor outflows

Funds selling relatively illiquid assets

Price disruptions that will destabilize markets 

Source: SEC’s FIMSAC sub-committee, Financial Stability 

Board; International Monetary Fund.
Liquidity mismatch in Bond Funds that hold illiquid assets

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Fund policy: Redeeming investors receive the end-of-day NAV. 

(1) NAVs do not capture the cost of liquidation. 

(2) Funds usually sell the most liquid assets first, making the fund’s 

holding less liquid over periods of persistent redemptions.

Transfers liquidation costs and liquidity risk from redeeming 

investors to other investors who keep money in the fund.

(theory) Large first-mover advantage in funds holding illiquid 

assets è amplifying withdrawals from illiquid funds.

(Empirics) Poor performance leads to large flows out of the bond 

sector, particularly for funds with illiquid holdings. 

Source: Chen, Goldstein and Jiang (2010, Journal of Financial Economics), 

Goldstein, Jiang and Ng (2017, Journal of Financial Economics).
Bond funds: unprecedented outflows during Covid-19 crisis

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Source: Falato, Goldstein and Hortacsu (2020): Financial Fragility in the Covid19 crisis, working paper, NBER.

Between February and March 2020

Cumulative outflows: 9% of Net Asset Value

Large fraction of funds experienced extreme

and persistent outflows.

Taper Tantrum (June-July of 2013)

Cumulative outflows: 2.2% of Net Asset Value

Large outflows in the week prior to

March 23 (Fed announcement)

Investment-grade funds and ETFs 

experienced large and sustained outflows 
Evidence from COVID:

Fund Illiquidity amplifies fragility, as predicted by theory 

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Evidence consistent with investor panic is first observed in

• Funds with less liquid holdings

• Funds exposed to higher fire-sale risk (commonality in holdings)

• Funds experiencing bad fund performance.

Fed’s announcement of corporate bond purchases stopped the 

outflows by calming the market. 

Next time around ...............

Swing pricing – mitigates the run dynamics.

• Introduced in 2018 but is still not implemented in US.

Evidence from UK – corporate bond funds

• Significantly reduced redemptions during stress periods.

Source: Falato, Goldstein and Hortacsu (2020); Jin, Kacperczyk, Kahraman, and 

Felix (2020) – available on SSRN. 
Safer assets faced larger price disruptions

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Source: Haddad, Moreira and Muir (2020): When selling becomes Viral, working 

paper, NBER.

Interpretation

Large and persistent selling 

pressure from bond investors 

trying to obtain cash by selling 

the safer and more liquid 

securities.

Prices recover after the Fed 

announcement to purchase 

assets.
Liquid ETFs traded at a discount to NAV

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Source: Haddad, Moreira and Muir (2020): When selling becomes Viral, working 

paper, NBER.

Investment-grade

ETFs trade at a large discount 

(5%) to NAV. Similar discounts 

are observed between large 

ETFs and identical “twin” 

mutual funds.

High-yield ETFs 

do not exhibit such dislocation.
Selling pressure and not information?

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Source: Haddad, Moreira and Muir (2020): When selling becomes Viral, working 

paper, UCLA and NBER.
Future Research

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New Fed policy as a financial stability tool? Is it beneficial 

in the long run?

Who drove the selling pressure?

• Bond funds

• Insurance companies

Source of structural fragilities & how to fix them

• Swing pricing.

ETF prices versus NAV (evaluated) prices

• Where is the real price?