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BIS-The anatomy of bond ETF arbitrage
March 1, 2021--Exchange-traded funds (ETFs) allow a wide range of investors to gain exposure to a variety of asset classes. They rely on authorised participants (APs) to perform arbitrage, ie align ETFs' share prices with the value of the underlying asset holdings. For bond ETFs, prominent albeit understudied features of the arbitrage mechanism are systematic differences between the baskets of bonds used to create and redeem ETF shares, and a low overlap between these baskets and actual asset holdings.
These features could reflect the illiquid nature of bond trading, ETFs' portfolio management and APs' incentives. The decoupling of baskets from holdings weakens arbitrage forces but allows ETFs to absorb shocks on the bond market. 1
Key takeaways
Bond exchange-traded funds (ETFs) have grown to manage more than $1.2 trillion of assets globally.
The arbitrage mechanism, which keeps bond ETF prices aligned with the value of the underlying investments, operates differently from that of equity ETFs.
This difference potentially makes it harder for investors to exploit price gaps but allows bond ETFs to absorb shocks and withstand market stress.
Markets wrestle with reflation prospects: BIS Quarterly Review
March 1, 2021-Prospects of a more robust economic recovery buoyed risky asset prices, with signs of exuberance reflected in the behaviour of retail investors.
Sovereign yield curves steepened as investors priced in higher inflation and fiscal support.
Sentiment towards emerging market assets remained favourable, in particular in East Asia.
The latest BIS Quarterly Review reports that risky assets strengthened further during the review period.1 This buoyancy was set against a backdrop of continued strong monetary accommodation, growing expectations of fiscal stimulus, and cautious but fluctuating optimism about recovering from the pandemic.
Elevated risk appetite was reflected in continued strong corporate debt issuance, especially by lower-rated firms. Many stock indices reached all-time highs in February with equity fund-raising reviving memories of the late 1990s tech boom as retail investors flexed their increasing influence on market dynamics.
Search for yield underpinned the broadly positive sentiment towards emerging market assets, particularly in East Asia, supporting portfolio flows into these economies.
Greening (runnable) brown assets with a liquidity backstop
March 1, 2021--Summary
Focus
The momentum toward greening the economy brings with it a number of new transition risks, which, if not properly addressed, may threaten financial stability. In particular, the expectation that other investors may exclude high carbon corporate emitters from their portfolio creates a risk of runs on brown assets. Understanding and acknowledging this new source of financial instability is essential for government agencies in charge of preserving the soundness of financial systems.
Contribution
We analyse whether a market economy where polluting firms are subject to a run risk can sufficiently incentivise those firms to reduce their carbon emissions, and how the laissez faire allocation fares relative to one that could be provided by policymakers. We postulate that uncertainty on the level of carbon-emission intensity that will be tolerated by consumers, investors or regulators can result in runs on significant shares of financial assets. In this context, we propose a liquidity backstop facility that helps restore efficiency. We show how offering such a backstop, whose access fee is proportional to the carbon emission of corporates, can prevent such runs while greening output.
Renewable energy: common myths debunked
March 1, 2021--Outdated misconceptions about the reliability and affordability of renewable energy must be challenged.
The transition to renewable energy is being driven by consumer demand and is happening faster than previously thought.
Grids of the future are already being built -buildings equipped with microgrids connected by software.
Critics of renewable energy often cite two reasons for why they think a transition from fossil fuels will take half a century.
Firstly, that sources of renewable energy are too intermittent to be reliable and secondly, that governments cannot bear the costs of switching entire economies to clean energy.
It’s about time these assumptions were challenged. These perceived obstacles for the mass adoption of clean, renewable energy technologies are quickly becoming outdated.
Myth: intermittency makes renewable energy unreliable
Conventional thinking has long held that renewable energy intermittency makes solar, wind and other green alternatives too unreliable. Thankfully, rapid technological innovation in recent years means this myth outdated.
It’s true that solar energy is only produced when the sun is shining on solar panels. Likewise, wind energy is dependent on the ebb and flow of air currents. But the sheer volume of renewable energy being deployed, the ability to store that energy for longer, and to match demand with supply using software, creates a balanced grid.
The Haves and Have-nots Of the Digital Age
March 1, 2021--Accelerated by the pandemic,the digital future is coming at us faster than ever before,and maybe faster than we can imagine. In this issue of Finance & Development magazine, we explore the possible consequences-the good,the bad,and the gray.
For millions,technology has been a lifeline, changing the way we work, learn,shop, and entertain ourselves. In a year like no other, it has spurred game-changing digital shifts. Governments moved quickly,using mobile solutions to provide cash assistance; financial technology has helped the survival, and in some cases, growth of small-and medium-sized businesses; and the first national digital currency, in The Bahamas, provides a glimpse of the future of money.
Tourism in a Post-Pandemic World
February 26, 2021--Tourism continues to be one of the sectors hit hardest by the COVID-19 pandemic, particularly for countries in the Asia-Pacific region and Western Hemisphere. Governments in these regions, and elsewhere, have taken measures to ease the economic shock to households and businesses, but longer-term the industry will need to adapt to a post-pandemic "new normal."
If you are hesitant to hop on a plane these days, you are not alone. According to the United Nations World Tourism Organization (UNWTO), tourist arrivals are estimated to have fallen 74 percent in 2020 compared to 2019.
Groundbreaking Research Reveals the Financiers of the Coal Industry
February 25, 2021--US investors hold 58% of institutional investments in the coal industry
Commercial banks providing more money to the coal industry than in 2016
Japanese banks are top lenders, Chinese banks top underwriters
Today, Urgewald, Reclaim Finance, Rainforest Action Network, 350.org Japan and 25 further NGO partners published groundbreaking research on the financiers and investors behind the global coal industry.
"Our new research, however, analyzes financial flows to all 934 companies on the Global Coal Exit List (GCEL)1," says Katrin Ganswindt, head of financial research at Urgewald.Top Institutional Investors in the Coal Industry. In January 2021, 4,488 institutional investorsheld investments totaling US$ 1.03 trillion in companies operating along the thermal coal value chain. Among the investors covered by the NGOs' research are pension funds, mutual funds, asset managers, insurance companies, hedge funds, commercial banks, sovereign wealth funds and other types of institutional investors. The world's largest institutional investor in the coal industry is the US mutual fund company Vanguard with holdings of almost US$ 86 billion. It is closely followed by BlackRock, which holds investments of over US$ 84 billion in the coal industry.Together, these two investment giants account for 17% of institutional investmentsin the global coal industry.
Structural Factors and Central Bank Credibility Limit Inflation Risks
February 19, 2021--After ending last year with unexpectedly strong vaccine success and hope that the pandemic and economic distress it caused would recede, we woke up to the reality of new virus variants and the unpredictable, winding road that it can lead the world down.
Something similar has happened with the discourse on inflation. At the end of last year, after a historic collapse of the global economy estimated at -3.5 percent, inflation was below target in 84 percent of countries. This was expected to allow for continued low interest rates and government spending to support growth, especially in advanced economies. The U.S. plan for an additional $1.9 trillion of fiscal spending has challenged this view, with even traditionally dovish economists raising concerns about an overheated economy that could push inflation well above the comfort zone of central bankers.
Bitcoin Hits $1 Trillion Value as Crypto Jump Tops Other Assets
February 19, 2021--Price of largest digital token surges to as much as $55,736.29
Rally has stoked a more than 100% jump in crypto index in 2021
Bitcoin's market value reached $1 trillion for the first time, a surge that's helping cryptocurrency returns far outstrip the performance of more traditional assets like stocks and gold.
The largest digital-asset has added more than $450 billion of value in 2021 to more than $1 trillion, data compiled by Bloomberg show. The Bloomberg Galaxy Crypto Index, which includes Bitcoin and four other coins, has more than doubled.
More than 10% of ETFs have changed their index, data show
February 18, 2021--Investors should read communications and check their holdings regularly, industry figures suggest.
Exchange traded funds climbed to prominence on their promise of a low-fee, broad-based approach with a relatively safe path for investors who followed a long-term, buy-and-hold regimen.
However, data from TrackInsight suggest that advice might need updating. The findings show that 11 per cent of ETFs have changed the index they are benchmarked against in some way, and that on average those that did so made the change 5.6 years after they launched.
