Financial Fragility in the COVID-19 Crisis: The Case of Investment Funds in Corporate Bond Markets

Abstract

and participants at the Brookings Webinar on "COVID-19 and the Financial System -How and Why Were Financial Markets Disrupted?", the Princeton-Stanford Conference on "Corporate Finance and the Macroeconomy under COVID-19", and the Atlanta Fed Conference on "Financial Stability and the Coronavirus Pandemic" for helpful comments and discussions. Jacob Faber provided excellent research assistance. All remaining errors are ours.At least one co-author has disclosed additional relationships of potential relevance for this research. Further information is available online at http://www.nber.org/papers/w27559.ack NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

Corporate Bond Liquidity During the COVID-19 Crisis

“…For example, consistent with our own findings, Haddad et al (2020) document that the severe dislocations in the corporate bond market disappeared soon after the Fed's interventions. Falato et al (2020) and Ma et al (2020) offer further evidence, establishing that bond mutual funds and ETFs experienced record inflows in April and May after massive outflows in March 2020. However, for robustness, we perform a second binary IV estimation that does not rely on the assumption that E Jan [θ t ] = E Jun [θ t ], but rather that θ t had settled down to some (arbitrary) level by May 2020.…”

“…In the corporate bond market, Falato, Goldstein, and Hortac ¸su (2020) study the effect of the pandemic on outflows from bond mutual funds, and the role that the Fed's corporate credit facilities played in reversing these outflows. Ma, Xiao, and Zeng (2020) also explore outflows in fixedincome mutual funds, including those that invest in corporate bonds and Treasuries.…”

“…The first was a surge in the demand for immediacy, or so-called "dash for cash," as investors pulled out of corporate bond funds in droves. For example, Falato et al (2020) report that, between the months of February and March, the average corporate bond fund experienced cumulative outflows of approximately 9% of net asset value-by far the largest outflows in the last decade. At the same time, market participants reported that dealers were either unable or unwilling to supply customers with immediacy by absorbing corporate debt onto their balance sheet.…”

The COVID-19 pandemic and sovereign credit risk

“…First, we contribute to the growing literature regarding the effects of COVID-19 on financial markets (e.g. Agca et al , 2020; Baker et al , 2020; Daehler et al , 2020; Falato et al , 2020; Goodell, 2020; Kartal, 2020; Kwan and Mertens, 2020; Reinders et al , 2020). In particular, our study provides new evidence that COVID-19 widens sovereign CDS spreads.…”

Capital Flows During the Pandemic: Lessons for a More Resilient International Financial Architecture

“…How flows were intermediated also seems to have played an important potential amplifying role. For flows intermediated by corporate bond funds, it was those funds that held (i) less liquid assets and (ii) greater commonality of holdings with other funds, which suffered the biggest outflows (Falato et al, 2020). This is in line with previous analysis showing that mutual fund flows are particularly prone to large outflows when global financial conditions tighten, constituting a key "pipe" in the global financial plumbing, amplifying push and pull-type shocks (Carney, 2019) The Covid-19 crisis was the first real test of the financial regulatory reforms that were introduced in response to the Global Financial Crisis (GFC), a decade before.…”