08-02-2024
Both academics and regulators consistently warn that open-end bond mutual funds pose a significant risk to financial stability, notes David Wessel, director of the Hutchins Center on Fiscal and Monetary Policy at Brookings.
The Securities and Exchange Commission (SEC) has proposed certain requirements to mitigate risks. Among other proposals, the SEC suggests requiring open-end funds to keep at least 10% of their portfolio in highly liquid assets, such as short-term Treasury bills, so that they can satisfy a flood of shareholder redemptions without selling much less liquid municipal or corporate bonds.
In their paper “Flow-Induced Trading: Evidence from the Daily Trading of Municipal Bond Mutual Funds,” Daniels School finance professor Sergey Chernenko and coauthor Viet-Dung Doan of Hong Kong Baptist University find that such a requirement is likely to have “a limited effect” on mutual funds sales of bonds from their portfolio when investors pull out large sums.
Chernenko presented the paper at the 2024 Municipal Finance Conference at Brookings.
Read more in Wessel’s research piece “Would a 10% cash buffer on open-end bond funds reduce fire sales?”
