Many people believe that financial engineering rarely creates value but this is one of those nice compelling counterexamples. People/firms don't really want to own bonds. They want the income stream from bonds. The ETF may be a better vehicle for that desire than the bonds are.
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This is a close cousin to "You want equity exposure, because you expect to live many more years, but since you're not a market professional you really shouldn't want to pick equities per se, so just buy a low-cost Vanguard ETF." But it's a subtly different flavor.
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Both bond funds and bond ETFs are tricky to own because you can get caught in a fund or index in which the NAV (net asset value) moves up or down depending on rates and stays there for a long period making it hard to get out of without a loss.
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Either way, now is not a good time to own bonds IMO. Yield curve is flat and rates are painfully low. Trump wants the Fed to keep cutting but there isn’t much room left to go. 10 YR Treasury is 0.812 %. Ouch!
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ETFs may be "softening the blow" of a problem that they contributed to create in the first place. ETF inflows which then allow investors to hedge out of their underlying bond positions result from the lack of liquidity in the bond market as noted.
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But the lack of liquidity in the bond market was exacerbated in the first place by the deluge of sell orders as the ETF is on a fire sale. The illusion of liquidity in the ETF is adding to the dislocation in the underlying bond market.
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