Template-Type: ReDIF-Paper 1.0
Author-Name: Simon Gilchrist
Author-X-Name-First: Simon
Author-X-Name-Last: Gilchrist
Author-Name: Bin Wei
Author-X-Name-First: Bin Wei
Author-X-Name-Last: Bin
Author-Name: Vivian Z Yue
Author-X-Name-First: Vivian
Author-X-Name-Last: Z Yue
Author-Name: Egon Zakrajšek
Author-X-Name-First: Egon
Author-X-Name-Last: Zakrajšek
Title: The Fed takes on corporate credit risk: an analysis of the efficacy of the SMCCF
Abstract: We evaluate the efficacy of the Secondary Market Corporate Credit Facility (SMCCF), a program designed to stabilize the U.S. corporate bond market during the Covid-19 pandemic. The Fed announced the SMCCF on March 23, 2020, and expanded the program on April 9. Our results show that the two announcements significantly lowered credit and bid-ask spreads, the former almost entirely through a reduction in credit risk premia. The announcements had a differential effect on the program-eligible bonds relative to their ineligible counterparts, but this difference is not due to program eligibility per se, according to our results. Rather, the announcements restored the "normal" upward-sloping profile of the term structure of credit spreads by substantially reducing spreads at the short end of the maturity spectrum relative to spreads at the long end. Using an IV approach, we also document important announcement-induced spillovers across all bonds outstanding for issuers whose bonds were likely to be purchased by the facility. Finally, we show that the Fed's actual purchases had negligible effects on credit and bid ask spreads. Our results highlight the extraordinary power of modern central banks: when markets have trust in the central bank's ability to deliver on its promise, as exemplified by the iconic "whatever it takes" remark by Mario Draghi, the central bank needs to do less (if anything) to deliver on its promise.
Length: 47 pages
Creation-Date: 2021-09
File-URL: https://www.bis.org/publ/work963.pdf
File-Format: Application/pdf
File-Function: Full PDF document
File-URL: https://www.bis.org/publ/work963.htm
File-Format: text/html
Number: 963
Keywords: covid-19, credit market support facilities, diff-in-diff, event study, purchase effects
Classification-JEL: E44, E58, G12, G14
Handle: RePEc:bis:biswps:963