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Financial fragility in the COVID-19 crisis: The case of investment funds in corporate bond markets

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  • Falato, Antonio
  • Goldstein, Itay
  • Hortaçsu, Ali

Abstract

Using daily microdata, we document major outflows in corporate-bond funds during the COVID-19 crisis. Large outflows were sustained over weeks and most severe for funds with illiquid assets, vulnerable to fire sales, and exposed to sectors hurt by the crisis. By providing a liquidity backstop for their bond holdings, the Federal Reserve bond purchase program helped to reverse outflows especially for the most fragile funds. In turn, the program had spillover effects on primary market issuance and peer funds. The evidence points to a “bond-fund fragility channel” whereby the Fed liquidity backstop transmits to the real economy via funds.

Suggested Citation

  • Falato, Antonio & Goldstein, Itay & Hortaçsu, Ali, 2021. "Financial fragility in the COVID-19 crisis: The case of investment funds in corporate bond markets," Journal of Monetary Economics, Elsevier, vol. 123(C), pages 35-52.
    • Handle: RePEc:eee:moneco:v:123:y:2021:i:c:p:35-52
    DOI: 10.1016/j.jmoneco.2021.07.001
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    More about this item

    Keywords

    Crises; Fragility; Fixed income markets; Mutual funds; Transmission of unconventional monetary policy;
    All these keywords.

    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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