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The Fed takes on corporate credit risk: an analysis of the efficacy of the SMCCF

Author

Listed:
  • Simon Gilchrist
  • Bin Wei
  • Vivian Z Yue
  • Egon Zakrajšek
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.

Suggested Citation

  • Simon Gilchrist & Bin Wei & Vivian Z Yue & Egon Zakrajšek, 2021. "The Fed takes on corporate credit risk: an analysis of the efficacy of the SMCCF," BIS Working Papers 963, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:963
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    More about this item

    Keywords

    covid-19; credit market support facilities; diff-in-diff; event study; purchase effects;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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