Benchmarking the Effects of the Fed’s Secondary Market Corporate Credit Facility Using Yankee Bonds

43 Pages Posted: 18 Nov 2021

See all articles by Hui Xu

Hui Xu

Lancaster University - Lancaster University Management School

George Pennacchi

University of Illinois

Date Written: August 20, 2021

Abstract

We use “Yankee” bonds, which are dollar-denominated bonds issued by foreign corporations but traded in the US, to benchmark the effects of the Federal Reserve’s Secondary Market Corporate Credit Facility (SMCCF). The SMCCF was established to purchase short-term, investment-grade bonds of US, but not foreign, corporations. Our tests apply a difference-in-differences technique to bond subsamples sorted by short- and long- maturities and AA, A, BBB, and BB credit ratings. Consistent with the SMCCF’s objective, we find that its announcement reduced the yield spreads on short-maturity US investment-grade bonds relative to the yield spreads on similarly-rated short-maturity Yankee bonds. Yet our results show that it also led to relatively lower yield spreads on US long-maturity AA- and A-rated bonds. Moreover, yield spreads on US BB-rated bonds actually rose relative to the spreads on their Yankee counterparts, indicating the SMCCF harmed these excluded bonds. Using the Amihud measure and bond-CDS basis as proxies for illiquidity, our analysis also shows that the SMCCF influenced both the illiquidity and default risk components of US bond yield spreads.

Keywords: SMCCF, Corporate Bond, Credit Risk, Covid-19

Suggested Citation

Xu, Hui and Pennacchi, George G., Benchmarking the Effects of the Fed’s Secondary Market Corporate Credit Facility Using Yankee Bonds (August 20, 2021). Available at SSRN: https://ssrn.com/abstract=3918433 or http://dx.doi.org/10.2139/ssrn.3918433

Hui Xu (Contact Author)

Lancaster University - Lancaster University Management School ( email )

Bailrigg
Lancaster, LA1 4YX
United Kingdom

George G. Pennacchi

University of Illinois ( email )

4041 BIF, Box 25
515 East Gregory Drive
Champaign, IL 61820
United States
217-244-0952 (Phone)

HOME PAGE: http://https://giesbusiness.illinois.edu/profile/george-pennacchi

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
72
Abstract Views
479
Rank
590,811
PlumX Metrics