The Fed Takes On Corporate Credit Risk: An Analysis of the Efficacy of the SMCCF

Simon Gilchrist, Bin Wei, Vivian Z. Yue, and Egon Zakrajšek
Working Paper 2020-18
September 2020

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Abstract: We evaluate the efficacy of the Secondary Market Corporate Credit Facility (SMCCF), a program designed to stabilize the corporate bond market in the wake of the COVID-19 shock. The Fed announced the SMCCF on March 23 and expanded the program on April 9. Regression discontinuity estimates imply that these announcements reduced credit spreads on bonds eligible for purchase 70 basis points (bp). We refine this analysis by constructing a sample of bonds—issued by the same set of companies—that differ in their SMCCF eligibility. A diff-in-diff analysis shows that both announcements had large effects on credit spreads, narrowing spreads by 20 bp on eligible bonds relative to their ineligible counterparts within the same set of issuers across the two announcement periods. The March 23 announcement also reduced bid-ask spreads 10 bp within 10 days of the announcement. By lowering credit spreads and improving liquidity, the April 9 announcement had an especially pronounced effect on "fallen angels." The actual purchases lowered credit spreads by an additional 5 bp and bid-ask spreads by 2 bp. These results confirm that the SMCCF made it easier for companies to borrow in the corporate bond market.

JEL classification: E44, E58, G12, G14

Key words: COVID-19, credit market support facilities, regression discontinuity, diff-in-diff, event study, purchase effects link

The views expressed here are those of the authors and not necessarily those of the Federal Reserve Bank of Atlanta, the Federal Reserve System, or the Bank for International Settlements. Any remaining errors are the authors’ responsibility.

Please address questions regarding content to: Simon Gilchrist, Department of Economics, New York University and National Bureau of Economic Research; Bin Wei, Research Department, Federal Reserve Bank of Atlanta; Vivian Z. Yue, Department of Economics, Emory University and NBER; or Egon Zakrajšek, Monetary and Economic Department, Bank for International Settlements and Center for Economic and Policy Research.

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