When Selling Becomes Viral: Disruptions in Debt Markets in the COVID-19 Crisis and the Fed’s Response

69 Pages Posted: 4 May 2020 Last revised: 7 Jul 2020

See all articles by Valentin Haddad

Valentin Haddad

University of California, Los Angeles (UCLA) - Anderson School of Management; National Bureau of Economic Research (NBER)

Alan Moreira

University of Rochester - Simon Business School

Tyler Muir

University of California, Los Angeles (UCLA) - Anderson School of Management; National Bureau of Economic Research (NBER)

Date Written: May 1, 2020

Abstract

We document extreme disruption in debt markets during the COVID-19 crisis: a severe price crash accompanied by significant dislocations at the safer end of the credit spectrum. Investment-grade corporate bonds traded at a discount to CDS; ETFs traded at a discount to their NAV, more so for safer bonds. These disruptions disappeared after the Fed announced it would buy corporate bonds. The initial announcement, targeting investment-grade debt only, lowered the spreads of bonds with the most severe dislocations. The later expansion of the program boosted prices throughout markets. We use these facts to evaluate potential channels behind the disruption.

Keywords: COVID-19, Bond Markets, Financial Crisis, Liquidity, CDS-Bond Basis, ETF Arbitrage, Federal Reserve

Suggested Citation

Haddad, Valentin and Moreira, Alan and Muir, Tyler, When Selling Becomes Viral: Disruptions in Debt Markets in the COVID-19 Crisis and the Fed’s Response (May 1, 2020). Available at SSRN: https://ssrn.com/abstract=3590819 or http://dx.doi.org/10.2139/ssrn.3590819

Valentin Haddad (Contact Author)

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Alan Moreira

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

Tyler Muir

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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