Corporate Bond Purchases After COVID-19: Who Did the Fed Buy and How Did the Markets Respond?

Abstract

The Federal Reserve Bank and the U.S. Treasury bought several individual corporate bonds in response to COVID-19. We show that the program purchased bonds that became highly information-sensitive due to the crisis, bonds used as collateral in the repo market by primary bond dealers, and bonds held by corporate bond funds. It did not target bonds issued by firms that were hit harder by the pandemic or firms with a large employee base. On policy announcement days, credit spreads on all corporate bonds came down significantly, but the effect was stronger for the bonds more likely to be purchased. We find no evidence that the announcements improved the equity valuations of firms with purchased bonds. Further, primary dealers from whom large amounts of bonds were bought experienced significantly higher equity returns around the policy announcement days. Overall, these findings suggest that the program relaxed the funding constraints of intermediaries and supported secondary market liquidity.

Keywords: SMCCF, Fed-Treasury SPV, Repo

JEL Classification: G21, G28