The Federal Reserve Board published an analysis of liquidity transformation in U.S. bank loan and high-yield mutual funds using Securities and Exchange Commission Form N-PORT data. The median bank loan fund’s liquid assets have remained stable at about 4.5% of net assets since 2024, while its Level 3 assets have approached pandemic-era levels since 2025, indicating increased liquidity transformation risk. For high-yield funds, the median liquidity ratio has remained near 4% since 2020, while illiquidity has declined on balance. During the April 2025 tariff-related volatility, bank loan and high-yield funds with above-median liquidity ratios experienced larger average weekly outflows than less-liquid funds, consistent with riskier funds holding larger precautionary liquidity buffers. The pattern reversed for bank loan funds in March 2020, when funds with lower initial liquidity suffered significantly larger monthly outflows. The analysis concludes that the relationship between liquidity and redemptions depends on the nature of the stress and cautions that Level 3 assets capture only the most extreme form of portfolio illiquidity.
2026-08-19Federal Reserve Board
Federal Reserve Board analysis finds rising liquidity transformation risk in bank loan funds, declining risk in high-yield funds
Federal Reserve Board analysis finds that liquidity transformation risk has increased in bank loan mutual funds as Level 3 assets approach pandemic-era levels while liquid asset ratios remain stable. Risk has declined on balance in high-yield funds. Evidence from the March 2020 and April 2025 stress episodes indicates that the relationship between liquidity buffers and redemptions varies with the nature of the shock.