Wall Street's Worst-Case Scenario: A Run on Bonds

All it takes is a few mouse clicks to buy shares in the Scout Unconstrained Bond Fund, an open-end fund that tracks a concoction of debt tied to the government, financial firms, mortgage pools, and other entities.

And all it takes is a few mouse clicks to sell—something that has begun to worry Wall Street. Since the financial crisis, $900 billion has flowed into ETFs and bond mutual funds, bringing the industry’s total holdings to $3 trillion. Fund investors who sell shares get their money back almost immediately, as if they were making a withdrawal from a money-market fund. The bonds that the funds own are far less liquid, often trading in telephone conversations or e-mails between brokers, away from exchanges. If too many people decide to get out of bond funds at the same time, the wave of selling could lead buyers to sit on their hands, bringing the system to a halt.