Intermediary Balance Sheet Constraints, Bond Mutual Funds' Strategies, and Bond Returns

63 Pages Posted: 23 Oct 2023 Last revised: 29 Feb 2024

See all articles by Mariassunta Giannetti

Mariassunta Giannetti

Stockholm School of Economics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Swedish House of Finance

Chotibhak Jotikasthira

Southern Methodist University (SMU) - Finance Department

Andreas C. Rapp

Board of Governors of the Federal Reserve System

Martin Waibel

Stockholm School of Economics; Swedish House of Finance

Date Written: February 27, 2024

Abstract

We show that after the introduction of leverage ratio constraints on bank-affiliated dealers, bond mutual funds have engaged in more liquidity provision in investment-grade corporate bonds and that the performance of funds with liquidity-supplying strategies has benefited. Not only have regulations transferred profits associated with liquidity provision in the corporate bond market to mutual funds, but the liquidity and returns of investment-grade corporate bonds have become more exposed to redemptions from the bond mutual fund industry, suggesting that the regulations may have made investment-grade corporate bonds more volatile. Accordingly, we observe that investment-grade corporate bonds that are more exposed to leverage ratio constraints experienced a more severe deterioration in liquidity and returns at the onset of the COVID-19 pandemic.

Keywords: Bond mutual funds, Intermediary Constraints, Corporate Bonds, Liquidity, Leverage Ratio

JEL Classification: G23, G12, G28

Suggested Citation

Giannetti, Mariassunta and Jotikasthira, Chotibhak and Rapp, Andreas C. and Waibel, Martin, Intermediary Balance Sheet Constraints, Bond Mutual Funds' Strategies, and Bond Returns (February 27, 2024). Swedish House of Finance Research Paper No. 23-10, SMU Cox School of Business Research Paper No. 23-19, Available at SSRN: https://ssrn.com/abstract=4607843 or http://dx.doi.org/10.2139/ssrn.4607843

Mariassunta Giannetti (Contact Author)

Stockholm School of Economics ( email )

P.O. Box 6501
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HOME PAGE: http://sites.google.com/site/mariassuntagiannetti/Home

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
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Belgium

HOME PAGE: http://www.ecgi.org

Swedish House of Finance ( email )

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Chotibhak Jotikasthira

Southern Methodist University (SMU) - Finance Department ( email )

United States

Andreas C. Rapp

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

HOME PAGE: http://https://www.federalreserve.gov/econres/andreas-c-rapp.htm

Martin Waibel

Stockholm School of Economics ( email )

PO Box 6501
Stockholm, 11383
Sweden

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

HOME PAGE: http://https://martinwaibel.com

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