## Multi-Sector Bond Funds in Emerging Markets—Easy Come, Easy Go

_Global Financial Stability Notes, December 16, 2021_

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## Bibliographic details
- Authors: Fabio Cortes, Luca Sanfilippo
- Published: December 16, 2021
- Series: Global Financial Stability Notes
- DOI: https://doi.org/10.5089/9781616357689.065

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### Summary and central finding
- 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.

### Behavioral characteristics of MSBFs
- 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.

### Market impact and consequences
- 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.

### Policy implications and considerations
- 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.

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_Source: 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_