Tabula highlights dual threat of illiquid bond markets and inflation uncertainty

Nov 30th, 2020 | By | Category: Fixed Income

ETF STRATEGY NEWS! ETF Strategy is delighted to announce the launch of ETF Strategy Hub (hub.etfstrategy.com), an on-demand repository of webcasts, videos, podcasts and white papers. Debuting with Special Series on Technology & Innovation in China and the Digital Economy.


Fixed income ETF specialist Tabula Investment Management has issued a warning to investors over the dual threats of lower year-end liquidity in bond markets and rising US inflation.

MJ Lytle, Chief Executive, Tabula Investment Management

Michael John Lytle, CEO of Tabula Investment Management.

Liquidity drought

Tabula warns that bond markets often see lower liquidity as the year closes out with the sell-side preparing to slim balance sheets and the buy-side closing its books; however, current uncertainty means liquidity could prove worse than previous years.

Michael John Lytle, CEO of Tabula, said, “The current slew of negative factors means markets may experience more than just a seasonal liquidity slump this year. As European lockdowns ease there is a risk of a third wave of cases in the middle of winter. President Trump’s resistance to the election result also remains a wildcard and expectations of worsening economic data is beginning to grow. All of these have the potential to temper the recent vaccine-led relief rally.”

Tabula offers up its Tabula iTraxx IG Bond UCITS ETF as a potential solution for investors who share these concerns. The ETF is based on the iBoxx iTraxx Europe Bond Index and has a strong focus on liquidity.

The index provides European corporate bond exposure that closely reflects the geographic and sector exposures of the iTraxx Europe, a widely followed benchmark measuring the performance of a long credit position in credit default swaps on 125 high-quality European issuers.

The index selects up to three bonds for each issuer in the current iTraxx Europe series that have a minimum outstanding amount of EUR 500 million and remaining time to maturity of 3-7 years (extended to 1-10 years if an issuer has no bonds in the 3-7 year range).

The index is constructed with fixed sector weight bands. The base weights are autos & industrials (24%), consumers (20%), energy (16%), TMT (16%), and financials (24%) – these are supersector categories composed of multiple conventional sectors and industries. With the exception of the financials sector, which is fixed, the sector weights are allowed to deviate by a maximum of 20% on either side of their base weight.

The index assigns an equal notional weighting to each issuer and targets an average maturity of approximately 5 years. The index is reviewed in March and September in line with iTraxx Europe.

To be eligible for the iTraxx Europe – effectively the selection pool for the index – a bond must have a fixed coupon, be denominated in euros and issued by a European-domiciled entity, and command an investment-grade rating.

The ETF is tradeable in euros on the London Stock Exchange (TTRX LN), Xetra (TABX GY), and Borsa Italiana (TTRX IM). It comes with an expense ratio of 0.29% and has accumulated €110 million in assets under management.

Inflation concerns

On inflation, Tabula notes that fiscal stimulus under the incoming Biden administration is expected to further increase upwards pressure on prices, while the Federal Reserve has committed to a new regime that will allow inflation to run ahead of its historic 2% target.

According to Tabula, President-elect Biden will likely be supportive of the Fed’s accommodative policy with his pick for Treasury Secretary, ex-Fed chair Janet Yellen, suggesting a close tie-up between fiscal and monetary authorities.

Tabula warns these factors, combined with the demand/supply fallout from Covid-19, indicates that inflation is once again firmly on the agenda and is likely to be an escalating concern among institutional investors.

Lytle said, “This year, we have witnessed extraordinary monetary stimulus, which when combined with loose monetary policy, introduces impetus for future inflation. The Federal Reserve Board balance sheet has doubled in six months, and global narrow & broad money supply are up 22% and 14% respectively this year – annual growth rates last seen in 1993 and 2008 respectively.

“Changing Central Bank mandates and new fiscal policies are also putting pressure on inflation. The incoming Biden administration is committed to further Covid-19-related stimulus including more direct payments to households. This, combined with what the Fed does next, could significantly affect the outlook for US inflation.”

Tabula’s most-recent listing, which launched last month, may offer a compelling solution to manage this inflationary environment. The Tabula US Enhanced Inflation UCITS ETF provides exposure to both realized and expected inflation by tracking the Bloomberg Barclays US Enhanced Inflation Index, a new index developed by Bloomberg in partnership with Tabula.

The index measures the performance of a diversified portfolio of US Treasury Inflation-Protected Securities (TIPS) combined with exposure to medium-term US inflation expectations. The two sleeves are weighted at 100%.

The TIPS portfolio is composed of securities with at least $500m face value outstanding and at least one year remaining until maturity. TIPS differ from regular Treasury bonds in that the principal amount of a TIPS issue is adjusted over time to reflect changes in the underlying Consumer Price Index, a measure of inflation. The yield on TIPS thus reflects a real interest rate where the effect of inflation has largely been stripped out.

The index’s exposure to inflation expectations is represented by a long position in 7-10 year TIPS and a short position in regular 7-10 year Treasuries to hedge out duration risk. An increase in 7-10 year inflation expectations will lead to a net appreciation in value as increasing inflation expectations cause the yields on regular Treasures to rise and their prices to fall, thus delivering positive performance for the short component of the trade. The short position is adjusted in order to offset the duration exposures of the two indices, thereby establishing a purer play on inflation expectations.

The ETF comes with an expense ratio of 0.29% for an unhedged USD share class on LSE (TINF LN) and 0.34% for GBP-hedged (TING LN) and EUR-hedged (TINE IM) share classes on LSE and Borsa Italiana respectively.

Tags: , , , , , , , ,

Leave a Comment