When Selling Becomes Viral: Disruptions in Debt Markets in the COVID-19 Crisis and the Fed’s Response

Valentin Haddad, Alan Moreira and Tyler Muir

No 27168, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study disruptions in debt markets during the COVID-19 crisis. The safer end of the credit spectrum experienced significant losses that are hard to fully reconcile with standard default or risk premium channels. Corporate bonds traded at a large discount to their corresponding CDS, and this basis widened most for safer bonds. Liquid bond ETFs traded at a large discount to their NAV, more so for Treasuries, municipal bonds, and investment-grade corporate than high-yield corporate. These facts suggest investors tried to sell safer, more liquid securities to raise cash. These disruptions disappeared nearly as fast as they appeared. We trace this recovery back to the unprecedented actions the Fed took to purchase corporate bonds rather than its interventions in extending credit. The March 23rd announcement to buy investment-grade debt boosted prices and lowered bond spreads (particularly at shorter maturities and the safer end of investment-grade) while having virtually no effect on high-yield debt. April 9th, in contrast, had a large effect on both investment-grade and high-yield, even for the riskier end of high yield which would only indirectly benefit from the policy. These facts highlight the importance of financial frictions early on in the crisis, but also challenge existing theories of these frictions.

JEL-codes: E5 E58 G01 G1 G12 G18 G21 G23 (search for similar items in EconPapers)
Date: 2020-05
New Economics Papers: this item is included in nep-fmk and nep-mac
Note: AP CF EFG ME
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Citations: View citations in EconPapers (35)

Published as Valentin Haddad & Alan Moreira & Tyler Muir & Itay Goldstein, 2021. "When Selling Becomes Viral: Disruptions in Debt Markets in the COVID-19 Crisis and the Fed’s Response," The Review of Financial Studies, vol 34(11), pages 5309-5351.

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