How have fixed income ETFs impacted the corporate bond market and the liquidity risk premium?

1 year ago
11

Fixed income ETFs have had a significant impact on the corporate bond market and the liquidity risk premium (LRP). According to a report by Barclays, the rising popularity of corporate bond ETFs and the portfolio trading they enable have made it easier for investors to manage portfolios, lowered trading costs, and increased liquidity.

As a result, the liquidity risk premium has dramatically declined since 2019, both relative to other asset classes and within the high-yield market itself. The decline in the LRP has coincided with the increased use of ETFs and portfolio trading.

Barclays estimates that the yield on high-yield (HY) debt is now 50-100 basis points less than it would have been without these improvements in liquidity management, accounting for the level of interest rates, the spread of investment-grade credit, and the ratings composition of the HY market.

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