The Causal Effect of the Fed's Corporate Credit Facilities on Eligible Issuer Bonds

Abstract

The Federal Reserve's Corporate Credit Facilities (CCFs) were launched in early 2020 amid significant volatility in the U.S. corporate bond market. The CCFs promised both direct support to firms via cash bond purchases, as well as indirect support via purchases of exchange-traded funds (ETFs). In this paper, we provide estimates of the treatment effect on corporate bond spreads from direct cash bond support by the CCFs. To do so, we introduce a novel identification strategy that exploits the ratings heterogeneity of corporate bonds across firms. We estimate that the initial announcement on March 23, 2020 of the CCFs led to a 96 bps decline in eligible issuers' spreads. To estimate the effect of the announced expansion of the facilities on April 9, 2020, we exploit a quasi-natural experiment. Fallen Angel issuers were initially eligible for the CCFs and fell out of eligibility but then had their eligibility reinstated at the same time as the expansion announcement. We compare these issuers with a comparable control group and find that the treatment effect for the expanded size of the facilities is -126 bps. Using a novel causal machine learning approach, we estimate the counterfactual treatment effect for ineligible issuers had they received direct cash bond support (and additional indirect support via ETFs) on March 23, 2020 to be -394 bps. While large, this estimate appears plausible considering that the spreads of Fallen Angel issuers tightened 258 bps on April 9, 2020 when their eligibility was restored.

Keywords: Corporate Bonds, COVID-19, Federal Reserve, Monetary Policy, PMCCF, SMCCF, Quantitative Easing, Liquidity, Bond Markets, Financial Crisis

JEL Classification: E43, E44, E50, E52, E58, G1, G12