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There's a few reasons. The Fed's mandate to "promote maximum employment" has taken the form of ensuring properly functioning capital markets. ETFs not getting t

by whatok 6y ago

There's a few reasons. The Fed's mandate to "promote maximum employment" has taken the form of ensuring properly functioning capital markets. ETFs not getting too dislocated from NAV is an important part of that because otherwise they become a useless hedging instrument. Lack of effective hedges increases volatility in markets and forces investors to reduce positions. Further reducing positions during a sell-off causes an even steeper sell-off, etc blah blah. Additionally and more importantly, primary market transactions are priced off secondary market levels. During the sell-off and before the Fed intervened, corporate bond issuance completely vanished. A large portion of US companies are debt-financed and would be unable to finance operations or be forced to pay way higher rates without functioning debt markets. Ensuring both the primary and secondary market functions properly fulfills (in their theory) their mandate of promoting maximum employment because without either, a lot more companies would have gone under or laid off way more people.

rndmwlk 6y ago
>ETFs not getting too dislocated from NAV is an important part of that because otherwise they become a useless hedging instrument. Sure, but that's only if we consider NAV to be "true" worth. To your point with the lack of liquidity in the underlying wouldn't logic dictate that the underlying needs to "catch up" so to speak?
- whatok 6y ago
  In normal functioning markets, maybe? When stuff like the events of the past few months happen, markets just stop trading altogether. If there's thin trading in an already illiquid market, there's no mechanism that forces things to reprice. What you see as NAV did not reflect executable levels. That's why you saw bond ETFs trading at such a discount because those were the only things people were able to sell. In a lot of cases most people decided they'd rather short 25mm of an ETF at -x% discount and have it retrace to NAV par than sell 10mm bonds down -1.5x% and then the next 15mm at an even steeper discount. Crude example, not how bonds are quoted, and you probably would have to sell those bonds in way more trades than that but hope it serves as an example.
  - rndmwlk 6y ago
    So, due to the liquidity issues the proxy market is essentially being used in place of the primary market and the Fed, understanding this better than I, opts to bolster this proxy market precisely because it is being used as a temporary primary market?

by whatok 6y ago

rndmwlk 6y ago

>ETFs not getting too dislocated from NAV is an important part of that because otherwise they become a useless hedging instrument. Sure, but that's only if we consider NAV to be "true" worth. To your point with the lack of liquidity in the underlying wouldn't logic dictate that the underlying needs to "catch up" so to speak?

whatok 6y ago
In normal functioning markets, maybe? When stuff like the events of the past few months happen, markets just stop trading altogether. If there's thin trading in an already illiquid market, there's no mechanism that forces things to reprice. What you see as NAV did not reflect executable levels. That's why you saw bond ETFs trading at such a discount because those were the only things people were able to sell. In a lot of cases most people decided they'd rather short 25mm of an ETF at -x% discount and have it retrace to NAV par than sell 10mm bonds down -1.5x% and then the next 15mm at an even steeper discount. Crude example, not how bonds are quoted, and you probably would have to sell those bonds in way more trades than that but hope it serves as an example.
- rndmwlk 6y ago
  So, due to the liquidity issues the proxy market is essentially being used in place of the primary market and the Fed, understanding this better than I, opts to bolster this proxy market precisely because it is being used as a temporary primary market?