Monetary Policy and the Corporate Bond Market: Reaching for Yield or Information Effects?

35 Pages Posted: 10 Dec 2019 Last revised: 9 Jun 2020

See all articles by Michael Smolyansky

Michael Smolyansky

Board of Governors of the Federal Reserve System

Gustavo Suarez

Board of Governors of the Federal Reserve System

Date Written: June 5, 2020

Abstract

Does expansionary monetary policy induce investors to reach for yield and drive up the price of risky assets? Or, do investors interpret monetary policy easing as a signal that economic fundamentals are weaker than they previously believed, prompting riskier asset prices to fall? We test these two competing hypotheses — i.e., the “reaching for yield” hypothesis and the “Fed information effect” hypothesis — in the context of the U.S. corporate bond market and find evidence strongly in favor of the latter. Following an unanticipated easing (tightening) of monetary policy on Federal Open Markets Committee announcement days, returns on corporate bonds with higher credit risk underperform (outperform) relative to safer corporate bonds. We conclude that monetary policy surprises are predominantly interpreted by market participants as signaling information about the state of the economy.

Keywords: monetary policy, corporate bonds, reaching for yield, Federal Reserve information

JEL Classification: E40, E52, G12, G14

Suggested Citation

Smolyansky, Michael and Suarez, Gustavo, Monetary Policy and the Corporate Bond Market: Reaching for Yield or Information Effects? (June 5, 2020). Available at SSRN: https://ssrn.com/abstract=3492049 or http://dx.doi.org/10.2139/ssrn.3492049

Michael Smolyansky (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Gustavo Suarez

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
70
Abstract Views
464
rank
358,489
PlumX Metrics