TheChek News Flow

Gap between closing price and vehicle’s net asset value surged to a 6.2% discount last week

Extremely volatile conditions across the US fixed income market because of the coronavirus pandemic have led to a highly unusual pricing dislocation in Vanguard’s $55bn total bond market exchange traded fund, one of the world’s largest ETFs.

The ETF, known by its ticker BND, saw the gap between its closing price and the net asset value of the fund surge to a 6.2 per cent discount on March 12. Most ETFs usually trade throughout the day in a very narrow band around the NAV of the fund.

Since its launch 13 years ago, BND’s closing premium has averaged 0.17 per cent. Fixed income ETFs generally trade at a slight premium to NAV but many have switched to a discount this month over concerns that companies will struggle to service debt payments because of disruption caused by the coronavirus outbreak.

But Rich Powers, head of ETF product management at Vanguard, the world’s second-largest asset manager after BlackRock, said it was “not unusual” to see this type of divergence in stressed market conditions. “Market prices for ETFs can move more rapidly than the net asset value. That is part of the price discovery process.”

The discount for BND had narrowed to 1.5 per cent by the close on Monday.

Steve Zamsky, an executive at Smith Capital and former head of US credit trading at Morgan Stanley, said: “ETF vehicles held up well until about 10 days ago, but then the NAV gaps started opening up, and they’ve been persistent ever since. It shows the challenges that are out there. Liquidity has been really, really rough, and subsequently there’s a lot of pressure in ETF land.”

BlackRock runs a directly competing ETF known as AGG. The discount for AGG widened to 4.43 per cent on March 12 and has since narrowed to 1.44 per cent. 

“Market makers are having to be extremely cautious in assuming and pricing risk in these challenging conditions. No one really has any clear idea about the pricing of some of the bonds held by these ETFs,” said Ben Johnson, director of passive funds research at Morningstar, the data provider.

Vanguard is one of the world’s largest bond managers and prides itself on the efficiency of its fixed income operations. The Pennsylvania-based group relies on an independent third-party provider to calculate the NAV of its fixed income ETFs using completed bond trades.

The closing price of the ETF is based on quotes from a wide range of market makers. It also reflects an assessment of the liquidity of the bonds held in the ETF by market makers.

“ETF market makers face uncertainty around the fair value of the bonds and how long they might have to hold them for while they wait for investors to trade. The market makers are pricing liquidity, and liquidity has a cost,” Mr Powers said.

He said that Vanguard’s fixed income ETF range had been trading at discounts ranging from 1 per cent to 4 per cent over the past two weeks.

About $500m was withdrawn from BND on March 12. BND is structured as a share class in Vanguard’s $269bn Total Bond Market mutual fund, the largest of its type in the world. Investors that withdrew from other share classes of the mutual fund were able to do so at the closing NAV.

Vanguard has received calls from a number of clients who traded on that day but it has not issued any specific communication relating to the ETF via emails or on its website.

“Vanguard’s fixed income ETFs have continued to trade as expected during this volatile period, providing valuable pricing insights and liquidity for investors that need it,” Mr Powers said.

Airlines should not get blank cheques to survive

Government aid to weather coronavirus crisis must be short-term

Airports around the world have become parking lots for grounded planes. The last time this many aircraft were idle was after the terrorist attacks of September 11 2001. Today’s near-shutdown of commercial aviation caused by the coronavirus is worse. It is likely to last much longer than the one two decades ago, and poses more of an existential threat to airlines.

Faced with the likelihood that carriers go bust, what should governments do? The calls for assistance are loud and urgent — global airlines need up to $200bn of support to help them through the crisis, the International Air Transport Association said on Tuesday. In the US, carriers have asked for an aid package worth $50bn. That would dwarf the $15bn granted after 9/11. In the UK, Virgin Atlantic says the industry needs assistance totalling £7.5bn. These are enormous sums, particularly when many industries — hotels, tourism, the entire hospitality sector, to name just a few — are making similar claims for support. If there were not enough of a strain on national treasuries already, health services the world over have a more important requirement for a serious injection of funds. Politicians must also consider how granting aid to airlines fits into the bigger picture of climate change and targets to cut carbon emissions.

While many political leaders will see the survival of airlines as strategically important — they are often called “flag carriers” for good reason — it is not hard to build a case that airlines should have to fend for themselves. Airline investors have done pretty well over the past decade, as consolidation has allowed companies to make money.

This is particularly true in the US, where a few mega-carriers have not only made decent returns but devoted much of their free cash flow to share buybacks. A recent analysis by Bloomberg found that the five biggest US carriers spent 96 per cent of their free cash flow in the past decade on stock buybacks. Several have in the past also availed themselves of US laws governing bankruptcy protection.

In Europe, where too many airlines are still chasing too few passengers, a shake-out was always inevitable. There are carriers whose business models would not be sustainable even without the stress of today’s pandemic. In Italy, the state is poised to hand Alitalia a €600m rescue package; if it happens, the bailout would mark just the latest intervention by the state. Any rescue must come with strict conditions attached. Above all, the government must make sure the interest of the taxpayer is protected. Similarly, if a carrier is rendered insolvent by the crisis then this could mean the government taking ownership — albeit only temporarily — before a comprehensive restructuring.

Given the importance of airlines to the wider economy, there is nevertheless a case for co-ordinated, short-term state support to help them weather this storm. No one knows how long it will last and even those carriers with access to cash and credit lines today may require assistance in a few months’ time. Ensuring liquidity to keep operations going and to keep up payments to suppliers is vital. Short-term loans, grants or tax relief are all options governments should consider. As with any loan, however, airlines must put up collateral in exchange. Governments should have priority over other non-trade creditors, even secured ones.

The UK and Australia are among those due to announce targeted packages in the coming days. Aviation will play a key role in the global recovery effort once the crisis passes. A targeted approach to help carriers navigate the turbulence is the right way forward — but not at any price.

Beijing takes further measures against Voice of America and Time; Secretary of State Pompeo criticizes action

BEIJING—China said it would revoke the press credentials of Americans working for three major U.S. newspapers in the largest expulsion of foreign journalists in the post-Mao era, amid an escalating battle with the Trump administration over media operating in the two countries.

China’s Ministry of Foreign Affairs said Wednesday it was demanding that all U.S. nationals working for The Wall Street Journal, the New York Times and the Washington Post whose press credentials expire by the end of the year turn those credentials in within 10 calendar days.

The affected reporters won’t be allowed to report anywhere in China, including the semiautonomous territories of Hong Kong and Macau, the statement said.

It also ordered five outlets—the Journal, Times and Post as well as the Voice of America and Time—to submit information about staff, finances, operations and real estate in China.

Beijing’s move heightens tensions between the U.S. and China, the world’s two biggest economies, which have been engaged in a trade war over the past two years. The fight recently spilled into the media sphere as the two countries forced the departure of journalists or staff from each others’ media outlets.

The U.S. National Security Council, in a pair of tweets on Tuesday, criticized China’s expulsion of American journalists. “The Chinese Communist Party’s decision to expel journalists from China and Hong Kong is yet another step toward depriving the Chinese people and the world of access to true information about China,” the NSC wrote. In another tweet, the White House called on China to instead focus on helping the world combat coronavirus, which the NSC pointedly described as the “Wuhan coronavirus.”

The actions are “reciprocal countermeasures that China is compelled to take in response to the unreasonable oppression the Chinese media organizations experience in the U.S.,” The Chinese Ministry of Foreign Affairs said in a statement, citing a spokesperson.

On March 2, the Trump administration announced a personnel cap on four state-run Chinese media outlets, forcing them to reduce their Chinese employees in the U.S. to 100 in total, from 160. That move came shortly after China expelled three Journal reporters in response, China’s Foreign Ministry said, to a headline on an Opinion column that referred to China as “the real sick man of Asia.”

Before that the White House had reclassified state-run Chinese media news organizations as “foreign missions,” requiring them to declare their personnel and property to the State Department.

Secretary of State Mike Pompeo disputed the Chinese government’s contention that its action came in response to the Trump administration’s measures.

“This isn’t apples to apples,” Mr. Pompeo told reporters at the State Department. “You all know the press freedoms you have…We know that that kind of freedom doesn’t exist inside of China.”

He said the individuals affected by the U.S. policy decision are employed not by independent media organizations, but by “Chinese propaganda outlets.” He said he hoped Beijing would reconsider its decision.

Although Chinese officials claim to want others to better understand events inside China, Mr. Pompeo said, Beijing works to “deny the world the capacity to know what’s really going on” there.

Matt Murray, editor in chief of the Journal, said in a tweet: “China’s unprecedented attack on freedom of the press comes at a time of unparalleled global crisis. Trusted news reporting from and about China has never been more important. We oppose government interference with a free press anywhere in the world.”

“Our commitment to reporting fully and deeply on China is unchanged,” Mr. Murray added.

Schools ordered to stay open despite government advice to curb social contact

Most universities across the UK suspended face-to-face teaching on Tuesday, as schools were ordered to stay open despite the government stepping up advice to curb social contact to try to slow the coronavirus outbreak.

After nearly a week of universities scaling back teaching hours, the vast majority have notified students that they will have to move to online learning in the next few days.

Institutions took the decision in the absence of clear government guidance, after prime minister Boris Johnson called on all members of the public to limit interactions with others to stop the spread of Covid-19.

Universities UK said its members were “working hard” to implement social distancing strategies while continuing to teach. It insisted that the majority of universities remained open, and that students would be able to keep living in their halls of residence. Many students are opting to go home.

“Most universities cannot fully close as they have commitments to students who live on campus, to certain research that must run around the clock and to maintaining infrastructure and other systems that cannot simply be switched off or left unattended,” it added.

The closures come as widespread confusion continued in primary and secondary schools when Mr Johnson confirmed that schools would stay open despite ramping up social distancing measures.

Some schools were either forced to close on Tuesday or made a unilateral decision to fully or partially shut because of lack of staff as teachers and assistants observed the government’s self-isolation requirements.

Lucy Elphinstone, the headteacher of the private Francis Holland School in London, wrote to parents to announce that the school would close “until it was deemed safe to reopen”, and warned that it could remain closed for “many weeks”.

She attacked the government’s decision to keep schools open as “confusing” and she said she was “not prepared to endanger” the lives of “teachers and vulnerable members of our families”.

Cardinal Newman School in Brighton and King’s School in Hove were among the state schools to partially close because of staff shortages, with year eight and nine pupils asked to participate in online lessons at home.

Teddington School, in Richmond, London, was closed to all year groups except years 11 and 13 in order to prioritise pupil’s exams. Headteacher Kathy Pacey wrote in a statement that she had “reluctantly reached the conclusion that, as a result of widespread staff illness and self-isolation” she could “no longer safely keep the school open to all students”.

Education unions have warned the government that staff absence and self-isolation would force many schools to close regardless of government guidance and called for plans to deal with exam disruption, and the impact of school closures on safeguarding for vulnerable children and those on free school meals.

The National Education Union, one of the UK’s biggest teachers unions, wrote to the government calling for limited closure of schools to avoid teachers, pupils and family members from being put at heightened risk to coronavirus.

In a video posted to Twitter on Tuesday, education secretary Gavin Williamson defended the government policy to keep schools open.

“The chief medical officer has said the impact of closing schools on children’s education would be substantial, but the benefit to public health would not be,” he said.

Ofsted, the schools inspectorate, said on Tuesday that it was suspending inspections. “It’s clearly the right thing to do when teachers and social workers are under pressure as a result of the coronavirus outbreak,” said Amanda Spielman, head of the watchdog.