Anatomy of a liquidity crisis: Corporate bonds in the COVID-19 crisis

Maureen O'Hara and Zhou, Xing (Alex)

Journal of Financial Economics, 2021, vol. 142, issue 1, 46-68

Abstract: We examine the microstructure of liquidity provision in the COVID-19 corporate bond liquidity crisis. During the two weeks leading up to Federal Reserve System interventions, volume shifted to liquid securities, transaction costs soared, trade-size pricing inverted, and dealers, particularly non-primary dealers, shifted from buying to selling, causing dealers’ inventories to plummet. Liquidity provisions in electronic customer-to-customer trading increased, though at prohibitively high costs. By improving dealer funding conditions and providing a liquidity backstop, the Primary Dealer Credit Facility and the Secondary Market Corporate Credit Facility (SMCCF) stabilized trading conditions. Most of the impact of SMCCF on bond liquidity seems to have materialized following its announcement. We argue that the Federal Reserve's actions reflect a new role as market maker of last resort.

Keywords: Corporate bonds; Liquidity crisis; COVID-19; PDCF; SMCCF; Electronic trading; Customer-to-customer; Market maker of last resort (search for similar items in EconPapers)
JEL-codes: G14 G21 G23 G24 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (92)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:142:y:2021:i:1:p:46-68

DOI: 10.1016/j.jfineco.2021.05.052

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