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

53 Pages Posted: 18 May 2020 Last revised: 27 Mar 2021

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 2020

Abstract

We study disruptions in debt markets during the COVID-19 crisis. The safer end of the credit spectrum experienced significant losses that are hard to fully reconcile with standard default or risk premium channels. Corporate bonds traded at a large discount to their corresponding CDS, and this basis widened most for safer bonds. Liquid bond ETFs traded at a large discount to their NAV, more so for Treasuries, municipal bonds, and investment-grade corporate than high-yield corporate. These facts suggest investors tried to sell safer, more liquid securities to raise cash. These disruptions disappeared nearly as fast as they appeared. We trace this recovery back to the unprecedented actions the Fed took to purchase corporate bonds rather than its interventions in extending credit. The March 23rd announcement to buy investment-grade debt boosted prices and lowered bond spreads (particularly at shorter maturities and the safer end of investment-grade) while having virtually no effect on high-yield debt. April 9th, in contrast, had a large effect on both investment-grade and high-yield, even for the riskier end of high yield which would only indirectly benefit from the policy. These facts highlight the importance of financial frictions early on in the crisis, but also challenge existing theories of these frictions.

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 2020). NBER Working Paper No. w27168, Available at SSRN: https://ssrn.com/abstract=3603798

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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