Open ended bond funds and emerging markets: Early warning signal from India?

Commentators in the US and Europe sound regular warning bells about liquidity risk if investors in bond funds try to redeem in troubled markets.

In an early taste of the challenge JP Morgan had to impose limits in September on investor redemptions due to exposure to a single downgraded credit. Amtek Auto defaulted in September and two of its funds had around $30 million of exposure, comprising 15% of one fund’s NAV and 5% of the other. The consequent fall in NAV led JPM to impose a limit on redemptions of 1% per day in order to ensure remaining investors were not left with illiquid investments. The illiquid bonds were then later placed into a segregated fund and investor redemptions could recommence. The Indian regulator is reviewing further single issuer limits for funds.

Read more here in the FT