Industry Updates

Australian ETF industry seeks central bank's help on corporate bonds

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The ETF industry and its lobby group, the Financial Services Council (FSC), asked the Reserve Bank of Australia (RBA) if it would support the corporate bond market,

ETF Stream


Coronavirus-induced volatility has placed a huge strain on Australian corporate bonds. The strain has flowed through to corporate bond ETFs, which own billions of dollars’ worth of these bonds.

The strain has meant ETFs have started trading at prices below the value of the bonds they own, called “discounts”. At their peak, some ETFs traded on discounts wider than 10%.

The FSC is understood to have asked the RBA if it would intervene in the corporate bond market. Such an intervention would benefit both ETF providers and investors. Other central banks around the world – particularly the Federal Reserve in the US – have intervened directly in their country’s corporate bond markets.

The FSC declined to answer questions from ETF Stream.

A Vanguard spokesperson denied that they had directly approached the RBA. But confirmed the lobby group had been talking to the central bank, expressing the industry’s concerns.

“Other than participating in industry consultations on volatile trading conditions Vanguard has not had any discussions with RBA on a standalone basis. The FSC has been leading and coordinating these industry consultations,” they said.

Bond ETF discounts no problem, say Zenith and Lonsec

Stephen Miller, investment adviser, at GSFM, says he is not surprised if ETF issuers have knocked on the RBA’s door. Miller previously worked for BlackRock’s fixed interest team. BlackRock issues iShares ETFs.

“There is very little inventory in the corporate debt market when markets are stressed. At the moment the RBA would resist the ETF industry’s advances," Miller said.

"They think they have taken enough risk by extending the asset-buying program to semi-government bonds. But they might be open to it in the future. The US Fed and the Bank of Japan do; the BoJ even buys equity ETFs. It would certainly ease liquidity pressures in the bond market. These talks could be the start of that process.”

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