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Fed looks at exit fees to prevent catastrophic bond fund run

Fed looks at exit fees to prevent catastrophic bond fund run

The Federal Reserve has opened talks with regulators over introducing exit fees to prevent a potentially catastrophic run on bond funds.

According to the Financial Times, the Fed has become increasingly concerned the $10 trillion (£6 trillion) corporate bond market is operating like a 'shadow banking' market. The paper claims discussions have taken place among senior Fed officials and members of US regulator, the Securities and Exchange Commission.

Just before he stood down last month Fed governor Jeremy Stein told the FT: 'So much activity in open-end corporate bond and loan funds is a little bit bank-like.

'It may be the essence of shadow banking....giving people a liquid claim on illiquid assets.'

Signs that US rates could be on the way up are believed to have acted as the trigger for talks.

US retail investors have poured $1 trillion into corporate bond funds since 2009, when the credit crisis was in its early days.

It is feared investors, who have become accustomed to the ultra-loose rate policy of the last five years, will indiscriminately sell bond holdings in panic as bond prices fall in the event of a rate hike.   

The Fed is currently holding its monthly rate meeting and is expected to shave another $10 billion from its monthly bond buying programme.

In March new Fed chair Janet Yellen (pictured) suggested the first rate increase would be early in 2015, and although the US economy recovery has gathered pace since, it would be a shock to see any movement this month.

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