By Chris Dieterich
NEW YORK--A flurry of selling in municipal bond ETFs this week
prompted one of the market's largest exchange-traded fund sponsors
to temporarily stop redeeming shares for cash. The move underscored
how hard-pressed frantic sellers became in the heat of this week's
selloff.
State Street Global Advisors, the asset management arm of State
Street Corp. (STT), told market participants Thursday that it would
only accept so-called "in kind" redemptions for its suite of
muni-bond ETFs, according to Tim Coyne, State Street's global head
of SPDR ETF capital markets. Mr. Coyne said that State Street
hadn't resumed allowing dealers to swap seven of its ETFs for cash
on Friday.
The move doesn't directly affect end investors who are selling
the ETF shares in the open market.
In bouts of strong selling, certain broker-dealers deliver
blocks of ETF shares to their issuer, who then retires unwanted
shares from the market. In return, dealers generally take ownership
of the underlying bonds from State Street, Mr. Coyne said. For a
fee, dealers can instead take cash from State Street, which then
sells the bonds back into the market.
On Thursday, selling bonds became so difficult and expensive
that State Street disallowed the option for dealers to take cash.
For State Street, the risk was that unloading bonds could eat into
investor returns, or cause the ETF's price to veer from its
underlying index, Mr. Coyne said.
Allowing only in-kind redemptions let ETF traders sell shares
easily despite an underlying market caught in gridlock.
For dealers, in-kind only redemptions could potentially pinch
those forced to take illiquid bonds onto their books.
Mr. Coyne said State Street's portfolio manager alerted dealers
of the change, stressing that redemptions were available at all
times on an in-kind basis.
"Our priority is to protect the existing shareholders in our
product," Mr.Coyne said. "Redemptions were not stopped at all. Our
standard procedure worked perfectly," he said.
Debt issued by states and local governments, like all bonds, has
been hit hard in recent weeks amid concerns about rising interest
rates. That selloff intensified this week after Federal Reserve
Chairman Ben Bernanke echoed that the central bank could pare back
its monthly bond-buying efforts should economic conditions
improve.
The relevant State Street securities are the $2 billion SPDR
Nuveen Barclays Short Term Municipal Bond (SHM); the $1.1 billion
SPDR Nuveen Barclays Capital Municipal Bond (TFI); the $232 million
SPDR Nuveen S&P High Yield Municipal Bond (HYMB); the $102
million SPDR Nuveen Barclays California Municipal Bond (CXA); the
$97 million SPDR Nuveen Barclays Build America Bond ETF (BABS); $32
million SPDR Nuveen Barclays New York Municipal Bond ETF (INY) and
$12 million SPDR Nuveen S&P VRDO Municipal Bond ETF (VRD).
On Thursday, traders rushing out of muni bonds resulted in
"fire-sale prices," said Jeffery Timlin, a managing director at
investment-management firm Sage Advisory Services.
"Once people come in and need their money, even if there's not a
bid, [ETFs] have to sell their bonds. There's no flexibility," Mr.
Timlin said. "In this market, everybody is a seller, and there's
too many people trying to exit at the same time."
Write to Chris Dieterich at
christopher.dieterich@dowjones.com;
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