Liquidity Transformation Risks in U.S. Bank Loan and High-Yield Mutual Funds

SRA Notes, Issue Number: 02, August 9, 2019

11 Pages Posted: 19 Aug 2019

See all articles by Kenechukwu Anadu

Kenechukwu Anadu

Federal Reserve Banks - Federal Reserve Bank of Boston; Babson College

Fang Cai

Federal Reserve Board

Multiple version iconThere are 2 versions of this paper

Date Written: August 9, 2019

Abstract

Assessing liquidity transformation risks in MFs is difficult, largely due to a lack of detailed data on fund assets’ liquidity. In this note, we identify some indicators of funds’ liquidity profiles, and examine them in a sample of bank loan (BL, also referred to as “leveraged loans”) and high-yield corporate bond (HY) MFs, which invest in relatively illiquid and riskier assets and, thus, for which vulnerabilities associated with liquidity transformation are generally most salient. We find that the ten largest BL MFs have increased their holdings of the hardest-to-value, generally most illiquid assets over the past decade. Moreover, the average fraction of liquid assets (by our measure) to total assets held by BL MFs have held relatively stable over the same period. This combination of rising hard-to-value, illiquid holdings amid generally stable liquid holdings might indicate rising liquidity risks. We also find that the ten largest HY MFs’ relative holdings of the hardest-to-value assets declined modestly in recent years, and liquid assets have held relatively stable, although the range has widened.

Keywords: leveraged loans, high-yield corporate bonds, open-end mutual funds, liquidity transformation

Suggested Citation

Anadu, Kenechukwu and Cai, Fang, Liquidity Transformation Risks in U.S. Bank Loan and High-Yield Mutual Funds (August 9, 2019). SRA Notes, Issue Number: 02, August 9, 2019 , Available at SSRN: https://ssrn.com/abstract=3437385

Kenechukwu Anadu (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Boston ( email )

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Boston, MA 02210
United States

Babson College ( email )

231 Forest St.
Babson Park, MA 02457-0310
United States

Fang Cai

Federal Reserve Board ( email )

Office of Financial Stability Policy and Research
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Washington, DC 20551
United States
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202-263-4850 (Fax)

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