Download This PaperIntermediary Balance Sheet Constraints, Bond Mutual Funds' Strategies, and Bond Returns
88 Pages Posted: 23 Oct 2023 Last revised: 2 Mar 2026
Date Written: June 06, 2024
Abstract
We show that after the introduction of the leverage ratio constraint on bank-affiliated dealers, bond mutual funds have engaged in more liquidity provision in investment-grade corporate bonds, and their performance has benefited. However, the liquidity and returns of investment-grade corporate bonds have become more exposed to aggregate outflows from bond mutual funds with liquidity-supplying strategies. Thus, the occasional inability of bond funds to purchase bonds exposed to leverage constraints impacts market functioning. We show that mutual funds' missing liquidity provision helps explain which bonds experienced more severe deterioration in liquidity and returns at the onset of the COVID-19 pandemic.
Keywords: JEL Classification: G23, G12, G28 Bond mutual funds, Intermediary Constraints, Corporate Bonds, Liquidity, Leverage Ratio
JEL Classification: G23, G12, G28
Suggested Citation: Suggested Citation
European Corporate Governance Institute (ECGI) ( email )
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Andreas C. Rapp
Board of Governors of the Federal Reserve System ( email )
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United States
HOME PAGE: http://https://www.federalreserve.gov/econres/andreas-c-rapp.htm
Martin Waibel
Board of Governors of the Federal Reserve System ( email )
20th Street and Constitution Avenue NW
Washington, DC 20551
United States