In 2018, The US high yield bond Exchange Traded Fund has made a wonderful and premium trading to its Net Asset Value up until October. However since October situation has changed a lot in an unfavourable way.

The international liquidity has begun to have a downward curve and yield bonds were starting to be swamped. This pushed a lot of companies including HYG (The US high yield bond ETF) to start thinking of a lot of solutions to overcome this problem. One of these solutions was putting their underlying into discounts because liquidation requires hedging in the Exchange Traded

Fund dominated making sales of the illiquid positions for underlying.

The ETF discount that has been made for its underlying was huge and reached 15 percent which was considered as a disaster as this 15 percent discount was applied to the enormously illiquid underlying.

UK’s most active manager said that this illiquidity will also come to credit markets which is something else to worry about, companies started to convert their products that have great liquidity to cash bonds.

Aberdeen Standard Investment that has $736 billion assets that are under management and it has already begun to switch those assets with large liquidity into cash bonds as they had their fears of a race for existence and this fearing of been “blowout” in the next two years made them make their switch recently.

The company believed that liquidity is the most important thing in the business and that thing will be understood if you have been in the market long enough and that he has already seen a similar situation as he called the “past blowout”.

The biggest fear here is that this liquidity crunch shifts to the ETF from the cash market, as investors are finding it a lot easier to transfer this risk using products that has synthetic index as Anindya Basu said (New Yorker Strategist at Citigroup Inc.) and she continues saying that it is a lot easier to getting in and out than buying and selling cash bonds as they can adjust their exposure to credit when the markets sell off, and it is a lot easier than cash bonds such as US high yield bond

Almost everyone agreed that liquidity is important because at the end of the cycle it is like a short-play story and at any time you would like to exit so you must have enough liquidity to exit smoothly. Charts and statistics show that the credit market is on the move and central banks are trying to help the situation by buying bonds and the leverage has been soaring which has affected the US high yield bond exchange.

But the most important question does this interfere with the central bank will help the stop of this leakage into the credit markets like US high yield bond exchange?