A single-silo credit allocator? In crisis, the Fed may swing the exit gate shut on you

heezsafe

Many (most?) people who use MFs for fixed-income investing do so in diversified vehicles that to a greater or lesser extent are also multi-sector. There are also some who are more contrarian, who rotate successfully/opportunistically from one fixed-income asset class to another, as good value arises from dislocations. Some do both.

This blog briefly notes the positives of both, in the context of how each approach could be impacted by measures the Fed Reserve is "considering" as part of a financial crisis action plan:
http://blog.alliancebernstein.com/index.php/2014/06/17/multisector-plan-can-help-avoid-the-crowd-in-credit/

You see, according to the Fed trial balloon leakthinking, under dire circumstances, retail investors in some transparent, open-end mutual funds might stampede for the exits in large sector-specific funds (the horror!); the degree to which this spasmic disorder would threaten the banking system of the country is so unpredictable, yet similar in impact to what one might expect to come from the "shadow banking system," that one should create contigency plans for a run on these funds as if they are part of the "shadow banking system." At least that's the way I'm interpreting what I've read here and elsewhere about this contrivance discussion:
http://www.ft.com/intl/cms/s/0/290ed010-f567-11e3-91a8-00144feabdc0.html?siteedition=intl#axzz34uHmImp0

See what you think, esp. you dangerous single-silo credit allocators.

heezsafe

This is a better explanation of what the Fed Reserve is concerned about (an unexpected liquidity event), but also discusses the unintended consequences (to bond investors) of an announcement that a blocking gate has been created:
http://davidstockmanscontracorner.com/a-horror-show-called-fed-gate-may-be-coming-to-your-bond-fund-soon/
[he's not on his rant box here; IOW, it's a safe read]

"Even the announcement of a rule-making would potentially trigger the very kind of sell-off that it would be designed to prevent. And if corporate bond prices took a tumble, it would not take long for equity markets to recognize that the massive flow of new debt capital which has been used to fund record stock buybacks could suddenly dry up."

Junkster

See February 4, 1994.

Old_Joe

Thanks for the new link, Heezsafe. I had attempted to follow the original but was unable to penetrate the FT site. It does make a lot of sense- a whole lot of folks have been burned badly in the past six years, have been forced to allocations that they may be primally uncomfortable with, and they are going to want to quickly move or get out of whatever they perceive to be turning against them. Seems to me that it would take one hell of a penalty to slow that down.

If it was up to me to deal with this, I'd be thinking of a gradual time-structured series of "gates" restricting the overall percentage that bond funds could be forced to liquidate. Maybe the gradual imposition would prevent an immediate rush for the doors, and allow for a long-term readjustment back to a normal environment, after which the "gates" could be gradually deleted.

Murphy strikes again!