Risks and Vulnerabilities in the U.S. Bond Mutual Fund Industry

IMF Working Papers, April 29, 2021

Source details

Canonical URL: Risks and Vulnerabilities in the U.S. Bond Mutual Fund Industry

Paper assesses liquidity risk for the United States (U.S.) bond mutual funds industry and analyzes which fund categories are more vulnerable to distress and how fund sales can impact financial stability.
Introduces a new measure labelled "Flows in Distress" to identify vulnerable fund categories based on expected outflows.

Develops and applies a new measure: "Flows in Distress" (expected outflows during stress).
Performs liquidity stress analyses and contagion analysis using data on fund flows and returns.
Evaluates price impact from combined sales by funds.

Overall resilience:
- "Overall, most U.S. mutual funds are resilient."
Vulnerable categories:
- "High yield (HY) and loan funds would face a liquidity shortfall when faced with severe redemption shocks."
Price impact:
- "Combined sales from funds can have a sizeable price impact."
Contagion dynamics:
- "Investment Grade (IG) corporate bonds funds, municipal bond funds and government bond funds are more likely to spread distress to other fund categories than HY, EM and loan funds."
- "When the first type of funds experiences stress, other funds categories are likely to experience stress as well."

Monitor and measure expected outflows using "Flows in Distress" to identify vulnerable fund categories.
Pay particular attention to HY and loan funds for liquidity shortfalls under severe redemptions.
Assess systemic impact of combined fund sales due to their potential for sizeable price impact.
Recognize that stress in IG corporate, municipal, and government bond funds can propagate to other fund categories, implying targeted oversight and contingency planning for these categories.