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

54 Pages Posted: 9 Sep 2020 Last revised: 16 Aug 2022

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: July 2022

Abstract

We evaluate 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. We show that the program announcements on March 23 and April 9, 2020, significantly lowered credit and bid-ask spreads across the maturity spectrum and ultimately restored the upward-sloping term structure of credit spreads. Using intraday event study methodology, we also document that actual program purchases reduced credit spreads of eligible bonds by about two basis points more than those of ineligible bonds. To shed light on the underlying mechanism, we calibrate a variant of the preferred-habit model and show that a "dash for cash," a sell-off 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 the 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 (July 2022). 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
20 Cooper Square 3rd Floor
New York, NY 10003-711
United States

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

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
179
Abstract Views
1,151
rank
164,216
PlumX Metrics