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Document Type

Article

Abstract

The US corporate bond market is typically disrupted during financial crises, when uncertainty and risk premiums are high and bond issuance is depressed. During the COVID-19 recession, the Federal Reserve introduced two unprecedented interventions: the Primary Market Corporate Credit Facility and Secondary Market Corporate Credit Facility. These backstop facilities stood ready to purchase corporate bonds when corporate bond spreads were wide. While existing literature highlights their effects on investment-grade bonds, the implications for high-yield (junk) bonds remain less well understood. We track uncertainty using the Cboe Volatility Index, or VIX; Jurado, Ludvigson, and Ng’s measures of macroeconomic uncertainty; and other measures. We find that the impact on junk spreads of the backstop facilities’ being open was statistically insignificant. Instead, we find a precedent effect in which the level of junk spreads has been permanently lower since the facilities were created. The evidence slightly favors the view that the precedent of the facilities has permanently reduced the level of the junk spread over an alternative view that the precedent of the facilities only lowered the risk sensitivity rather than the level of junk spreads. Results indicate that the effects of the Fed’s corporate bond facilities have persisted well after the facilities were closed.

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