Corporate Bond Market Dysfunction During COVID-19 and Lessons from the Fed's Responses

13 Pages Posted: 8 Nov 2020

Date Written: October 1, 2020

Abstract

Changes in the financial sector since the global financial crisis appear to have increased dramatically the demand for liquidity by holders of corporate bonds beyond the ability of the markets to provide it in stress events. The March market turmoil revealed the costs of liquidity mismatch in open-end bond mutual funds. The surprisingly large redemptions of investment-grade corporate bond funds added to stresses in both the corporate bond and Treasury markets. These conditions led to unprecedented Fed interventions, which significantly reduced risk spreads and improved market functioning, with much of the improvements occurring right after the initial announcement. The improved conditions allowed companies to issue bonds, which helped them to maintain employees and investment spending. The episode suggests several areas for further study and possible reforms.

Keywords: Market liquidity, corporate bonds, Treasury securities, bond mutual funds, COVID-19

JEL Classification: G01, G12, G23, E58

Suggested Citation

Liang, Nellie, Corporate Bond Market Dysfunction During COVID-19 and Lessons from the Fed's Responses (October 1, 2020). Available at SSRN: https://ssrn.com/abstract=3725503 or http://dx.doi.org/10.2139/ssrn.3725503

Nellie Liang (Contact Author)

Brookings Institution ( email )

1775 Massachusetts Ave, NW
Washington, DC 20036
United States

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