Credit in a Crisis : Effects of the Fed's Corporate Bond Market Intervention

We estimate the effects of the Federal Reserve’s Secondary Market Corporate Credit Facilities (SMCCF) on corporate bond market liquidity, yield, bond valuations and firm-level outcomes. Using comprehensive data on secondary market transactions in a diff-in-diff analysis, we find the SMCCF reduced trade-weighted average bid-ask spreads by 16 basis points and yield by 32 basis points, while the effect on corporate bond valuations was positive but economically small. Improvements in liquidity condition and valuation was driven primarily by the announcement of the facilities, while bond yield was driven down by actual purchases of eligible securities. When we augment this analysis with a credit-rating matched diff-in-diff, the reduction in yield is much larger. Matched firm-bond data indicate issuers increased their share of long-term debt, yet this effect is primarily driven by a flight-to-safety channel rather than SMCCF eligibility. While all issuers (eligible and ineligible) raised cash holdings, we find no evidence that eligible issuers raised capital expenditure. Overall, our results confirm the Fed's intervention helped restore financial stability in the secondary corporate bond market following disruptions associated with the COVID-19 pandemic, but had relatively small net effect at the firm-level