Heisenberg Report

Here’s What It Looks Like When Everyone Frontruns Jay Powell’s ETF Buying…

What happens when the Fed steps in and says it will buy investment grade credit ETFs as part of a raft of measures aimed at unfreezing critical markets and supporting the US economy during what’s set to be the worst economic downturn in modern history?

Well, people frontrun that buying, that’s what.

Witness one of the largest one-day inflows on record for the previously beleaguered iShares iBoxx $ Investment Grade Corporate Bond ETF:

That’s a $1.06 billion inflow on Monday, and it makes sense. After all, the benefactors with the printing presses are in the game.

Any ETF “whose investment objective is to provide broad exposure to the market for US investment grade corporate bonds” is eligible under one of the Fed’s two corporate credit facilities. That definition for eligibility casts a wide net, and LQD certainty fits the description.

As noted when the Fed rolled out the new programs on Monday morning, dislocations not seen since the depths of the financial crisis have shown up across a number of credit ETFs since mid-February and LQD is on the front lines. The product surged almost 8% on Monday after the Fed’s announcement and was up another 2%+ at one point Tuesday.

Read more: The Fed’s ‘Shock And Awe’ Part II – Open-Ended QE, Corporate Bond Buying, Credit ETF Purchases And More

Oh, and remember that massive discount to NAV which, by virtue of LQD’s popularity, was one of the poster children for credit ETFs cracking under the strain as the crisis exposed the underlying liquidity mismatch/maturity transformation inherent in their structures?

Yeah, well, it looks as though that discount is now a big premium. In fact, it’s the biggest premium since 2009.

“It’ll be interesting to see how long this Fed injection lasts”, Bloomberg’s Eric Balchunas said. “LQD clearly loved it, leapfrogging its NAV”.

Here’s the “flip”, as it happened on Monday after the Fed’s bazooka:

(BBG)

And that may end up being a curse. After all, the Fed did say it would “avoid purchasing shares of eligible ETFs when they trade at prices that materially exceed the estimated net asset value of the underlying portfolio”.

Jokes aside, the good vibes are likely to linger. “The Fed will provide a steady bid”, Todd Rosenbluth, director of ETF research at CFRA Research, told Bloomberg.