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High-yield bond markets during the COVID-19 crisis: the role of monetary policy

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  • Dmitry Khametshin

    (Banco de España)

Abstract

This article documents the difference in corporate bond issuance between the euro area (EA) and the United States (US) in 2020, especially in the high-yield (HY) segment, and discusses the role that the monetary policy measures undertaken by the US Federal Reserve (Fed) and the ECB in response to the Covid-19 crisis may have played in explaining such difference. We document that the issuance of HY bonds since February 2020 has been lower by historical standards in the EA than in the US. The Fed’s measures aimed at the HY segment, mainly the purchase of HY bond exchange traded funds (ETFs), could have reduced credit spreads and improved market liquidity, which in turn could have stimulated debt issuance. Alternatively, HY issuers in the EA may have faced better bank funding conditions due to the ECB’s targeted longer term refinancing operations (TLTRO) and to other measures by national fiscal authorities, leading such issuers to substitute bank credit for bond finance. The article discusses these possibilities and argues that they all may have played a role to a certain extent.

Suggested Citation

  • Dmitry Khametshin, 2021. "High-yield bond markets during the COVID-19 crisis: the role of monetary policy," Occasional Papers 2110, Banco de España.
    • Handle: RePEc:bde:opaper:2110
    as

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    File URL: https://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosOcasionales/21/Files/do2110e.pdf
    File Function: First version, March 2021
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    References listed on IDEAS

    as
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    2. Gilchrist, Simon & Wei, Bin & Yue, Vivian Z. & Zakrajšek, Egon, 2024. "The Fed takes on corporate credit risk: An analysis of the efficacy of the SMCCF," Journal of Monetary Economics, Elsevier, vol. 146(C).
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    4. D’Amico, Stefania & King, Thomas B., 2013. "Flow and stock effects of large-scale treasury purchases: Evidence on the importance of local supply," Journal of Financial Economics, Elsevier, vol. 108(2), pages 425-448.
    5. Chodorow-Reich, Gabriel & Darmouni, Olivier & Luck, Stephan & Plosser, Matthew, 2022. "Bank liquidity provision across the firm size distribution," Journal of Financial Economics, Elsevier, vol. 144(3), pages 908-932.
    6. Boyarchenko, Nina & Kovner, Anna & Shachar, Or, 2020. "It’s what you say and what you buy: A holistic evaluation of the Corporate Credit Facilities," CEPR Discussion Papers 15432, C.E.P.R. Discussion Papers.
    7. Julia Anderson & Francesco Papadia & Nicolas Véron, 2021. "COVID-19 credit-support programmes in Europe’s five largest economies," Working Papers 41282, Bruegel.
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    Cited by:

    1. Simone Letta & Pasquale Mirante, 2023. "Investigating the determinants of corporate bond credit spreads in the euro area," Temi di discussione (Economic working papers) 36, Bank of Italy, Economic Research and International Relations Area.

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    More about this item

    Keywords

    corporate bond purchase programs; monetary policy; COVID-19;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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