High-yield corporate bond mutual funds are on the rise: By late 2025, the combined total of the assets in these funds reached $263 billion – a 13% increase since 2019. In contrast, bank loan mutual fund assets declined by almost 21% to $71 billion over that period.

High-yield funds and bank loan funds – like all mutual funds – allow investors to redeem, or cash in, their investments daily. But the funds typically invest in underlying assets, like corporate bonds and loans, that are relatively “illiquid.” That means these assets cannot quickly be converted to cash without potentially significant losses.

If many investors try to cash in and exit the fund at once, it could result in a fire sale – when assets are sold at prices significantly below their fair value.

“That, in turn, could impact the underlying markets these funds invest in,” said Boston Fed Vice President Kenechukwu Anadu. “So, it’s important to monitor the liquidity profiles of these funds.”

But the data available to do so is limited, Anadu said. That’s why he and his Federal Reserve Board of Governors colleague Fang Cai introduced some indicators for monitoring the liquidity of corporate and bank loan mutual funds in 2019.

Now, Anadu and Cai have expanded their analysis in a new note called “Liquidity Transformation Risks in U.S. Bank Loan and High-Yield Mutual Funds: A 2026 Update.” It looks at a wider range of bank loan and high-yield corporate bond mutual funds and updates the metrics used to monitor their liquidity profiles.

The new note also looks at how investors in these funds reacted to the onset of COVID-19 in March 2020 and the “Liberation Day” tariff announcement in April 2025. 

Researchers used detailed SEC data to measure funds’ liquidity

Anadu and Cai coauthored the report with Boston Fed analyst Sean Baker and Logan George and Erik Larsson, both of whom work with Cai at the Division of Financial Stability.

The coauthors calculated the funds’ “liquidity” and “illiquidity” ratios by using monthly fund data reported to the U.S. Securities and Exchange Commission, and the methodology from Anadu and Cai’s 2019 paper.

A fund’s liquidity ratio is the sum of its cash and cash equivalents – such as Treasury bills and other short-term investments – divided by its “total net assets,” or the total market value of the fund’s assets minus its total liabilities.

A fund’s illiquidity ratio is the fraction of a fund’s total net assets that are considered “Level 3 assets,” which are extremely hard to value and cannot be easily converted to cash. Because this ratio measures only the most illiquid assets in a fund, it may not correlate exactly with a fund’s overall liquidity metrics.

The researchers found that the median liquidity ratios for both bank loan and high-yield corporate mutual funds have remained relatively stable over the past few years.

But while the illiquidity ratio of high-yield mutual funds has dropped, the illiquidity ratio of bank loan mutual funds has slightly risen. The authors said that this trend could suggest an increased “liquidity transformation risk” for bank loan funds, or the risk that occurs when a fund doesn’t have enough liquidity to meet investor redemptions and resorts to asset fire sales.

How did fund investors react to COVID-19, Liberation Day tariff announcement?

The coauthors used information about the mutual funds’ liquidity ratios to examine how investors reacted to the onset of COVID-19 in March 2020 and the announcement of the “Liberation Day” tariffs in April 2025. The researchers studied the funds’ “net outflows,” or the amount of money leaving a fund minus the amount entering it.

They found that after the “Liberation Day” announcement, funds that had above-median liquidity ratios in the prior quarter saw, on average, larger outflows than those with below-median liquidity ratios. The authors said these observations are generally consistent with other research done on this topic.

But they also found that during the onset of COVID-19, bank loan mutual funds that had below-median liquidity ratios in the prior quarter saw, on average, significantly larger net outflows than those with above-median liquidity ratios. The authors noted that this result differs from their “Liberation Day” findings and other pre-pandemic research, but it has some grounding in research conducted around the pandemic period.

The researchers said these findings suggest that while funds’ usual strategies to manage liquidity risk might be effective under normal circumstances, they may not be sufficient to address market dynamics under “extraordinary” shocks.

Read the full note on bostonfed.org.