Massive warning flag - $55 billion ETF dislocation

A massive warning flag out on Friday...

This chart is the difference between the price of the Vanguard Total Bond Fund (BND) ETF and the value of the bonds it holds. The ETF is trading fully 6% below the value of the bonds!

Someone is “comfortable” with selling this fund 6% below its fair value.

DEFINITION of FORCED SELLING

And this has been done in huge size as this is no random ETF. BND has $55 billion in assets and is either the largest bond ETF or right near the top (depending on which day it is measured).

The NAV discount here is bigger than the worst day in 2008 (Oct 10). The bond market was so bad back then that TARP was announced the next day. Only huge shifts from huge players can move this much.

This illustrates the extreme stress in the bond/credit markets right now.

“We are riding for a fall. There is definitely a great risk [in high-yield ETFs],” Mr Carl Icahn ... albeit a little early (2015).

See details on BND story here... would be surprised if only the biggest gets effected.

COVID-19 -> Liquidity crisis -> Credit Crisis! Possible? Not my base case, but worth thinking about.

Gareth Nicholson is the Head of Fixed Income Discretionary Portfolio Management at Bank of Singapore.