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Bond Market Crises and the International Lender of Last Resort

In: Fault Lines After COVID-19

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  • Robert N. McCauley

    (Boston University
    University of Oxford)

Abstract

As pandemic fears gripped investors in March 2020, foreign officials, US leveraged funds, and US bond funds all dumped US bonds. This massive selling severely strained the working of the US bond market. In response, the Federal Reserve opened its discount window to primary dealers, and bid without limit for Treasury bonds. It also took the unprecedented step of buying US corporate bonds. This purely domestic buying of last resort stabilised the global market for dollar bonds, reversing investor sales of international dollar bonds and boosting their prices. In this case, US domestic operations sufficed to steady global dollar markets. In a future crisis centred on the capital market rather than banking, central banks could use swap lines to fund concerted official buying of bonds.

Suggested Citation

  • Robert N. McCauley, 2023. "Bond Market Crises and the International Lender of Last Resort," Springer Books, in: Robert Z. Aliber & Már Gudmundsson & Gylfi Zoega (ed.), Fault Lines After COVID-19, pages 261-277, Springer.
    • Handle: RePEc:spr:sprchp:978-3-031-26482-5_16
    DOI: 10.1007/978-3-031-26482-5_16
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