Fire Sales by Corporate Bond ETFs During the COVID-19 Crisis

Abstract

This study investigates the short-term price impact of flow-driven fire sales by corporate bond exchange-traded funds (ETFs) during the COVID-19 crisis, using high-frequency daily data on ETF holdings and flows. We find that such fire sales exert significantly greater price pressure on underlying corporate bonds during the crisis than in non-crisis periods, with the effect concentrated in investment-grade (IG) bonds and largely absent in high-yield (HY) bonds. Notably, the heightened price impact diminishes following the Federal Reserve’s intervention in the corporate bond market. Further analysis suggests that the differing price impacts between IG and HY bonds may be driven by contrasting investor behavior during the COVID-19 crisis: IG ETF flows tend to shift toward positive feedback trading, while HY ETF flows move in the opposite direction. Overall, our paper contributes to a more nuanced understanding of how ETFs exacerbate fragility in the corporate bond market during periods of stress.

Keywords: Corporate bond ETFs, asset fire sales, price impact, COVID-19 crisis, ETF flows, corporate bond fragility, Federal Reserve's intervention

JEL Classification: G14