Bond Price Fragility and the Structure of the Mutual Fund Industry

We show that mutual funds with a large share of a bond issue sell their holdings of that issue to a lower extent when they experience redemptions, arguably because they attempt to avoid a drop in the bond price and the consequent negative feedback effects on the unsold part of their position. Since large bond funds tend to hold large shares of outstanding bond issues, they end up exercising a stabilizing effect on the bonds they hold. Bonds with greater ownership concentration outperform during periods of turmoil and have lower overall price volatility. We provide evidence that the tendency of bond funds to limit negative price spillovers on their large positions can help explain how the Fed's Secondary Market Corporate Credit Facility quickly stabilized both eligible and ineligible bonds.