March 13, 2020 / 9:18 PM / 2 months ago

Bond ETFs trading at deep discounts to assets

NEW YORK, March 13 (Reuters) - Some exchange-traded bond funds are pricing at a deep discount to their underlying assets, suggesting investors are having trouble buying and selling individual companies' bonds.

For the iShares iBoxx Investment Grade Corporate Bond ETF , that has created the widest gap between the price at which it trades and the underlying value of the assets - known as net asset value. LQD on Thursday traded at a nearly 5% discount to its net asset value, the widest spread since 2008.

"LQD trades and the underlying bonds don't trade. So you do have a mismatch in liquidity," said Monica Erickson, portfolio manager at DoubleLine Capital.

The PIMCO Investment Grade Corporate Bond Index ETF traded at a 4.3% discount to its net asset value on Thursday, the biggest gap since 2013.

Though the coronavirus outbreak has roiled markets, the effects of the pandemic on corporate earnings and cash flow are not yet fully clear, making it difficult to for investors to price companies' stocks and bonds.

Take Royal Caribbean Cruises LTD, which has taken a big hit to earnings and faces a potential credit downgrade into "junk" territory as the coronavirus has limited tourism. The company's bonds have fallen significantly, and the spread between the bid and ask prices - the seller's initial price and the price at which it is sold - have widened significantly.

"Price discovery right now is pretty difficult," said Erickson. "Stuff has been moving so quickly and bid-ask spreads are super wide."

That has meant that corporate bonds are traded less, and when they are, the difference between bid and ask prices are wider. But the ETFs that track those bonds have had less trouble trading. The harder the asset is to trade, the greater the price dislocation.

The problem seems to be in investment grade debt at the moment rather than in high yield. Two major high-yield bond ETFs saw spreads between their trade price and net asset value widen, but far less dramatically than in LQD. (Reporting by Kate Duguid Editing by Marguerita Choy)

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