S&P Dow Jones, ICE, FTSE, iBoxx Dump Index Rules And Postpone March Rebalance For Bond Indices

David Dierking

The instability in the fixed income markets has created liquidity issues, wild prices swings and price disconnections from underlying NAVs. Some funds have closed to new investors. A few have even frozen redemptions.

The Fed has dumped billions, if not trillions at this point, of dollars in order to stabilize these markets. Numerous credit facilities have been opened in order to help ensure a smooth flow of trading activity, availability of funds and an orderly trading environment.

The major bond indexers are trying to do their part not to rock the boat, but it sure seems outside the spirit of what indices are supposed to do.

Market volatility has resulted in headlines like this.

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All of the major indexers - S&P, iBoxx, FTSE and ICE - have decided to postpone the March month-end index rebalances.

The stated reason is that they don't want to increase the possibility of further instability in the markets in which these indexes are based. The liquidity concerns, on the surface, are valid. We've seen numerous credit downgrades into junk - the automakers and airlines chief among them - and an index rebalance now forces a flood of new supply onto an already fragile market. A ton of movement out of investment-grade funds and into junk funds likely puts additional downward price pressure on the high yield market and could force traders to accept pennies on the dollar for any bonds they want to dump.

So I get that part. But is this really in the spirit of what indexes are supposed to do?

Essentially, they're giving themselves the ability to actively manage a passive strategy.

It's easy to say right now that this is a one-time black swan event in which the unusual circumstances need to be considered for the benefit of the financial markets overall. But as we've seen in the past, does this open up the Pandora's Box that allows providers to declare "unusual circumstances" for any number of future situations in order to tilt the scales in their favor?

The Federal Reserve used to be in charge of maximizing employment and managing inflation. Now, they're perhaps the biggest market maker and liquidity provider in the entire world with a balance of nearly $6 trillion, probably headed towards $10 trillion. Exceeding an original mandate isn't unprecedented.

Perhaps I'm overly skeptical, but this seems like something that starts with good intentions and ends up quickly spiraling downward.

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