Monetary policy and the corporate bond market: How important is the Fed information effect?

36 Pages Posted: 10 Dec 2019 Last revised: 5 Feb 2021

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

Multiple version iconThere are 2 versions of this paper

Date Written: February 1, 2021

Abstract

Does expansionary monetary policy drive up prices 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 competing hypotheses within the U.S. corporate bond market and find evidence strongly in favor of the second explanation—known as the “Fed information effect”. Following an unanticipated monetary policy tightening (easing), returns on corporate bonds with higher credit risk outperform (underperform). 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: How important is the Fed information effect? (February 1, 2021). 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

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