and ConsequencesExploring the Causes and Consequences of Concentration Risk in Credit Markets from the Buy-Side Perspective

– Central banks have recently added direct purchases of corporate bonds to their quantitative easing programs, with the ECB and the US Federal Reserve holding billions of euros in corporate bonds.
– The buy-side structure of credit markets has become highly concentrated over the past decade, with the top five asset management firms commanding over 27% of global credit AUM.
– Efforts by regulators to discourage excessive risk-taking by financial intermediaries have limited their capacity to provide market liquidity, leading many market participants to turn to ETFs for alternative liquidity sources.
– ETFs have become a prominent buy-side investor in the corporate bond market but may not have the same investment objectives or incentives as traditional buy-side counterparts.
– Mutual funds and insurance companies are major owners of corporate and foreign fixed-income assets, contributing to buy-side concentration in the corporate bond market.
– The rise of ETF investing in the corporate bond market has potential impacts on price formation, liquidity, and the active management industry.
– Fixed-income ETFs appear to be less liquid than equity ETFs, especially in extreme market environments.
– Corporate bond ETFs may not collect the full market risk premium over the long run, due to general premiums and issuer risk concentrations.
– The oligopolistic market structure formed by ETFs in the corporate bond market has implications for investors seeking alpha in fixed-income markets and portfolio construction.