The Fed Takes on Corporate Credit Risk: An Analysis of the Efficacy of the SMCCF

41 Pages Posted: 9 Sep 2020 Last revised: 25 Jan 2024

See all articles by Simon Gilchrist

Simon Gilchrist

New York University (NYU)

Bin Wei

Federal Reserve Bank of Atlanta

Vivian Z. Yue

Emory University; Federal Reserve Banks - Federal Reserve Bank of Atlanta

Egon Zakrajsek

Bank for International Settlements (BIS)

Multiple version iconThere are 4 versions of this paper

Date Written: October 1, 2023

Abstract

This paper evaluates the efficacy of the Secondary Market Corporate Credit Facility (SMCCF), a program designed to stabilize the U.S. corporate bond market during the Covid-19 pandemic. The program announcements on March~23 and April~9, 2020, significantly reduced credit spreads across the maturity spectrum---irrespective of the SMCCF's maturity-eligibility criterion---and ultimately restored the normal upward-sloping term structure of credit spreads. The Fed's actual purchases reduced credit spreads of eligible bonds three basis points more than those of ineligible bonds, a sizable effect, given the modest amount of purchases. To shed light on the underlying mechanism, we calibrate a variant of the preferred-habit model and show that a "dash for cash''---a selloff of shorter-term lowest-risk investment-grade bonds---combined with a spike in the arbitrageurs' risk aversion, can account for the inversion of the credit curve during the height of the pandemic-induced turmoil in the market. Consistent with our empirical findings, the Fed's announcements, by reducing risk aversion and alleviating market segmentation, helped restore the upward-sloping credit curve in the investment-grade segment of the market.

Keywords: COVID-19, credit market support facilities, regression discontinuity, diff-in-diff, event study, purchase effects, preferred-habitat

JEL Classification: E44, E58, G12, G14

Suggested Citation

Gilchrist, Simon and Wei, Bin and Yue, Zhanwei and Zakrajsek, Egon, The Fed Takes on Corporate Credit Risk: An Analysis of the Efficacy of the SMCCF (October 1, 2023). Available at SSRN: https://ssrn.com/abstract=3686961 or http://dx.doi.org/10.2139/ssrn.3686961

Simon Gilchrist

New York University (NYU) ( email )

Bobst Library, E-resource Acquisitions
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Bin Wei (Contact Author)

Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States

HOME PAGE: http://https://www.frbatlanta.org/research/economists/wei-bin.aspx

Zhanwei Yue

Emory University ( email )

201 Dowman Drive
Atlanta, GA 30322
United States

Federal Reserve Banks - Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States

Egon Zakrajsek

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

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