September 5, 2019 / 10:04 AM / 12 days ago

EU watchdog test finds "vulnerabilities" in high yield bonds

LONDON, Sept 5 (Reuters) - European Union regulators said on Thursday that a stress test found “pockets of vulnerabilities” among high yield bond funds when it came to meeting theoretical requests from investors for their money back.

The European Securities and Markets Authority (ESMA) published a framework that supervisors can use to test the resilience of funds to shocks.

ESMA said that in a test case it applied the framework to 6,000 bond funds to simulate a redemption shock, or heavy calls from investors for their cash.

“The results show that overall, most funds are able to cope with such extreme but plausible shocks, as they have enough liquid assets to meet investors’ redemption requests,” ESMA said in a statement.

“However, pockets of vulnerabilities are identified, especially for high yield (HY) bond funds.”

Under the new framework’s “severe” assumptions, up to 40% of high yield bond funds tested could end up with too little liquid assets to meet redemptions. (Reporting by Huw Jones, editing by Iain Withers)

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