Monetary Policy and Fragility in Corporate Bond Mutual Funds

John Chi-Fong Kuong, James O'Donovan and Jinyuan Zhang

No 19361, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We document aggregate outflows from corporate bond mutual funds days before and after the announcement of increases in the Federal Funds Target rate (FFTar). To rationalize this phenomenon, we build a model in which funds’ net-asset-values (NAVs) are stale and investors strategically redeem to profit from the mispricing when they learn about the increases of FFTar. Consistent with the model's predictions, we find that stale NAVs and loose monetary policy environments weaken (strengthen) outflows sensitivity to increases in FFTar during illiquid (liquid) market conditions. Our results highlight when and how monetary policy could systematically exacerbate the fragility of corporate bond funds.

JEL-codes: E52 G14 G23 (search for similar items in EconPapers)
Date: 2024-08
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