World’s largest credit ETF sees record one-day inflows as traders front-run Fed

Federal Reserve

Traders have piled into investment-grade credit this week following the Federal Reserve’s announcement it will buy fixed income ETFs for the first time in its history.

The $34.5bn iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD), the world’s largest credit ETF, saw record one-day inflows of $1.5bn on Tuesday, according to data from Bloomberg Intelligence, beating the previous record of $1.09bn seen in 2016.

Mounting concerns about the long-term impact of the coronavirus pandemic led the Fed to announce an unlimited stimulus package on Monday which included the purchases of corporate bond ETFs, an unprecedented move by the US central bank.

The US central bank subsequently hired BlackRock on Tuesday to manage the billions of dollars of purchases including ETFs.

The bond purchases will be made through a Secondary Market Corporate Credit Facility which allows the Fed to own up to 20% of the assets of any broad-based ETF.

In response, traders have looked to front-run the Fed’s purchases by piling back into corporate bond ETFs, especially BlackRock’s LQD, after weeks of outflows.

The added liquidity in the market has led many fixed income ETFs, which were trading at all-time high discounts, to trade at a premium to their net asset values (NAV).

For example, LQD, which is up over 8% this week, is now trading at a 5% premium.

According to Peter Tchir, head of macro strategy at Academy Securities, LQD’s premium shows market makers were short credit.

He said in a note on Tuesday: “Market makers are now on the wrong side of any move. This should create a virtuous cycle for inflows and bids for bonds.”

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