Working Paper: CEPR ID: DP17050
Authors: Mariassunta Giannetti; Jotikasthira Chotibhak
Abstract: We show that mutual funds with a large share of a bond issue sell their holdings of that issue to a lower extent when they experience redemptions, arguably because they attempt to avoid a drop in the bond price and the consequent negative feedback effects on the unsold part of their position. Since large bond funds tend to hold large shares of outstanding bond issues, they end up exercising a stabilizing effect on the bonds they hold. Bonds with greater ownership concentration outperform during periods of turmoil and have lower overall price volatility. We provide evidence that the tendency of bond funds to limit negative price spillovers on their large positions can help explain how the Fed's Secondary Market Corporate Credit Facility quickly stabilized both eligible and ineligible bonds.
Keywords: bonds; mutual funds; fire sales; fed; corporate; quantitative easing; covid19 pandemic
JEL Codes: G12; G23; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Ownership concentration (G32) | Price stability (E31) |
| Large ownership stakes (G32) | Lesser selling during redemptions (G19) |
| Lesser selling during redemptions (G19) | Stabilizing influence on bond prices (E43) |
| Greater mutual fund ownership concentration (G23) | Outperformance during turmoil (E32) |
| Greater mutual fund ownership concentration (G23) | Lower price volatility (G13) |
| Fed's intervention (E52) | Focus on stabilizing efforts (E63) |
| Large stakes internalization of price effects (F69) | Overall market stability (D53) |