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
Date Written: May 1, 2020
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
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