Recent research from BlackRock finds that fire sales of bond mutual funds are unlikely in times of economic stress. The research finds that the diversity among bond mutual funds – including strategy, investments, and use by end investors – make it unlikely that all funds would react in the same way to market events. BlackRock analyzed historic market events (the 1994 Federal Reserve rate hikes, the 2008 financial crisis, the 2013 taper tantrum, and the 2015 high yield selloff) to see how fixed income funds have responded in the past. The research concludes that different categories of bond funds reacted differently to stress events – with some experiencing net outflows and some with net inflows. BlackRock also found that no major category of bond mutual fund had experienced a “massive aggregate outflow” during any quarterly period, including the times of market stress. In addition, while the size of the outflows had increased over times in pure dollar terms, the outflows as a percentage of assets did not materially change.
The research acknowledges, however, that “a sharper and more substantial increase in interest rates than has been experienced in the last 35 years could have implications for bond markets as a whole.” As a result, BlackRock recommends that funds have robust policies and procedures to monitor the impact of market events on liquidity, and that regulatory require “stress testing of individual open-end mutual funds’ abilities to meet redemption obligations.”