{
  "title": "Multi-Sector Bond Funds in Emerging Markets—Easy Come, Easy Go",
  "publication": "Global Financial Stability Notes, December 16, 2021",
  "sourceUrl": "https://www.imf.org/en/publications/global-financial-stability-notes/issues/2021/12/16/multi-sector-bond-funds-in-emerging-markets-easy-come-easy-go-511074",
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  "summary": "Unconstrained multi-sector bond funds (MSBFs) can be a source of spillovers to emerging markets and potentially exert a sizable impact on cross-border flows.",
  "sections": [
    {
      "heading": "Summary and central finding",
      "content": "- Unconstrained multi-sector bond funds (MSBFs) can be a source of spillovers to emerging markets and potentially exert a sizable impact on cross-border flows.\n- MSBFs have grown their investment in emerging markets in recent years and are highly concentrated—both in their positions and their decision-making.\n- Theoretically, MSBFs’ size, multisector mandate, and unconstrained nature allows them to be a source of financial stability in periods of wide-spread market turmoil while others sell at fire-sale prices.\n- Empirical finding: building on Cortes and Sanfilippo (2020) and incorporating data around the COVID-19 crisis, the note finds that MSBFs could have contributed to increase market stress in selected emerging markets."
    },
    {
      "heading": "Behavioral characteristics of MSBFs",
      "content": "- Opportunistic behavior: MSBFs typically exhibit opportunistic behavior much more so than other investment funds.\n- Concentrated rebalancing under stress: When faced with large investor redemptions during the COVID-19 crisis, the sample of MSBFs chose to rebalance portfolios in a concentrated manner.\n- Liquidity management outcome: MSBFs raised a large proportion of cash in a few specific local currency bond markets."
    },
    {
      "heading": "Market impact and consequences",
      "content": "- Amplification of stress: Concentrated rebalancing and cash-raising in a few local currency bond markets may have contributed to exacerbating the relative underperformance of these local currency bond markets to broader emerging market indices.\n- Cross-border flow implication: Because of their size and mandate, MSBFs have the potential to exert a sizable impact on cross-border flows into and out of emerging markets."
    },
    {
      "heading": "Policy implications and considerations",
      "content": "- Monitor concentration: Authorities and market participants should monitor concentration in positions and decision-making within MSBFs given their potential to create localized market stress.\n- Assess liquidity and redemption dynamics: Understanding MSBFs’ liquidity management choices under stress—particularly concentrated rebalancing—can inform macroprudential and market-stability responses.\n- Consider cross-border spillovers: Policy frameworks should account for the possibility that global, unconstrained funds can transmit shocks across markets through concentrated portfolio adjustments.\n\n---\n\n Content in this bundle\n\n- Multi-Sector Bond Funds in Emerging Markets--Easy Come, Easy Go\n  - Multi-Sector Bond Funds in Emerging Markets--Easy Come, Easy Go (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Multi-Sector Bond Funds in Emerging Markets--Easy Come, Easy Go (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/global-financial-stability-notes/issues/2021/12/16/multi-sector-bond-funds-in-emerging-markets-easy-come-easy-go-511074"
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    "Authors: Fabio Cortes, Luca Sanfilippo",
    "Published: December 16, 2021",
    "Series: Global Financial Stability Notes",
    "DOI: https://doi.org/10.5089/9781616357689.065",
    "Unconstrained multi-sector bond funds (MSBFs) can be a source of spillovers to emerging markets and potentially exert a sizable impact on cross-border flows.",
    "MSBFs have grown their investment in emerging markets in recent years and are highly concentrated—both in their positions and their decision-making.",
    "Theoretically, MSBFs’ size, multisector mandate, and unconstrained nature allows them to be a source of financial stability in periods of wide-spread market turmoil while others sell at fire-sale prices.",
    "Empirical finding: building on Cortes and Sanfilippo (2020) and incorporating data around the COVID-19 crisis, the note finds that MSBFs could have contributed to increase market stress in selected emerging markets.",
    "Opportunistic behavior: MSBFs typically exhibit opportunistic behavior much more so than other investment funds.",
    "Concentrated rebalancing under stress: When faced with large investor redemptions during the COVID-19 crisis, the sample of MSBFs chose to rebalance portfolios in a concentrated manner.",
    "Liquidity management outcome: MSBFs raised a large proportion of cash in a few specific local currency bond markets.",
    "Amplification of stress: Concentrated rebalancing and cash-raising in a few local currency bond markets may have contributed to exacerbating the relative underperformance of these local currency bond markets to broader emerging market indices.",
    "Cross-border flow implication: Because of their size and mandate, MSBFs have the potential to exert a sizable impact on cross-border flows into and out of emerging markets.",
    "Monitor concentration: Authorities and market participants should monitor concentration in positions and decision-making within MSBFs given their potential to create localized market stress.",
    "Assess liquidity and redemption dynamics: Understanding MSBFs’ liquidity management choices under stress—particularly concentrated rebalancing—can inform macroprudential and market-stability responses.",
    "Consider cross-border spillovers: Policy frameworks should account for the possibility that global, unconstrained funds can transmit shocks across markets through concentrated portfolio adjustments.",
    "**Multi-Sector Bond Funds in Emerging Markets--Easy Come, Easy Go**"
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