Sitting Bucks: Zero Returns in Fixed Income Funds
72 Pages Posted: 23 Sep 2018 Last revised: 3 Sep 2019
Date Written: August 31, 2019
Zero returns are highly prevalent in fixed-income funds: on more than 30% of trading days, net asset values (NAVs) do not change. High illiquidity of fund holdings drives this phenomenon, which is further compounded by binding minimum ticks. Consequently, NAVs are extremely stale, and fund returns are highly predictable at daily, weekly, and even monthly horizons. Investors respond by withdrawing capital from overvalued funds, exacerbating the risk of fund runs, while buy-and-hold investors face annual dilution costs of around $2 billion when others opportunistically buy and sell at incorrect prices. Our results reveal persisting shortcomings in existing fair valuation regulations that should correct this problem.
Keywords: Fixed income mutual funds, Stale prices, Fund flows, Fund runs
JEL Classification: G11, G14, G23
Suggested Citation: Suggested Citation