BlackRock Bond ETF Plunge Shows How Fast Traders Can Be Spooked

(Bloomberg) -- A BlackRock Inc. exchange-traded fund that invests in short-term bonds suffered an unprecedented plunge on rumors the firm was restricting cash redemptions.

The $6.2 billion iShares Short Maturity Bond ETF, one of the biggest exchange-traded funds that primarily holds debt maturing in less than three years, fell as much as 8.9% on Thursday -- 34 times its biggest intraday drop in 2019. It pared the decline late in the day as BlackRock paid out cash redemptions, closing down 6.2%.

Volatility is hitting all corners of the market as concerns about the economy and interest rates collide with communication challenges with many traders working from home or at backup facilities. Traders looking to redeem more than one unit were told they’d receive underlying bonds, not cash, according to a market maker, who asked not to be identified describing the discussions. That was followed by a steep plummet in a fund that normally is a model of consistency.

The ETF paid out about $150 million in redemptions Thursday, all in cash, according to BlackRock spokesman Ed Sweeney. He said there were no in-kind redemptions.

“Depending on market conditions, we assess all options to meet our clients’ needs,” Sweeney said. “In-kind redemptions are a feature of ETFs that can be used to facilitate redemptions and protect remaining fundholders.”

So-called in-kind redemptions are often used to channel assets out of ETFs but for funds that hold less widely traded securities, such as commercial paper, fund managers typically take responsibility for selling the securities and then distribute cash to redeeming shareholders. Placing responsibility on the market maker to sell the bonds in the midst of a global credit rout could fuel further losses.

Short-term corporate debt has been roiled as companies grapple with hits to revenue from the coronavirus pandemic and as investors weigh risks. Commercial paper -- typically used for meeting payroll and covering other short-term expenses -- is getting more expensive, so many firms are opting to draw down credit lines or seek other forms of financing instead.

The Federal Reserve stepped in on Tuesday, announcing that it would reintroduce the Commercial Paper Funding Facility, a measure it used during the financial crisis to shore up short-term funding markets.

The BlackRock ETF, with the ticker NEAR, fell $3.03 to $45.53 in New York trading, its lowest closing price since it debuted in 2013. Its biggest intraday decline in 2019 was 0.26%.

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