Capital Concentration of the Bond Fund Industry and Bond Market Fragility

This paper documents a high and increasing capital concentration in the bond fund industry over the past three decades. Large funds deliver better performance and receive larger inflows than small funds, which explains the concentration of bond funds. However, large funds take more risks by holding more illiquid corporate bonds, and their trading introduces fragility to underlying bonds during illiquid markets and financial crises. Exploiting the quasi-experiment when Bill Gross left PIMCO in 2014, we show that bond return volatility increases (decreases) with trading fund size when the aggregate market liquidity is low (high). These results reveal a subtle relation between fund size and bond market fragility