Working Paper: NBER ID: w27559
Authors: Antonio Falato; Itay Goldstein; Ali Hortasu
Abstract: In the decade following the financial crisis of 2008, investment funds in corporate bond markets became prominent market players and generated concerns of financial fragility. The COVID-19 crisis provides an opportunity to inspect their resilience in a major stress event. Using daily microdata, we document major outflows in corporate-bond funds during the COVID-19 crisis. Large outflows were sustained over weeks and most severe for funds with illiquid assets, vulnerable to fire sales, and exposed to sectors hurt by the crisis. By providing a liquidity backstop for their bond holdings, the Federal Reserve bond purchase program helped to reverse outflows especially for the most fragile funds. In turn, the program had spillover effects on primary market issuance and peer funds. The evidence points to a "bond-fund fragility channel" whereby the Fed liquidity backstop transmits to the real economy via funds.
Keywords: COVID-19; financial fragility; investment funds; corporate bonds; Federal Reserve
JEL Codes: G01; G21; G23; G38
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| COVID-19 crisis (H12) | outflows from corporate bond funds (G32) |
| Federal Reserve's bond purchase programs (E52) | mitigation of outflows from corporate bond funds (G33) |
| Federal Reserve's bond purchase programs (E52) | fund stability (G23) |
| Federal Reserve's bond purchase programs (E52) | stimulating primary market issuance (G10) |
| illiquidity and vulnerability to fire sales (G33) | stress experienced by funds (G23) |