How new Fed corporate bond programs cushioned the Covid-19 recession

• Published in: Journal of banking & finance 2022-03, Vol.136, p.106413-106413, Article 106413
• Main Authors: Bordo, Michael D., Duca, John V.
• Format: Article
• Language: English
• Subjects: Corporate bond facility; Corporate bonds; Credit easing; Federal Reserve; Financial crises; Lender of last resort
• ISSN: 0378-4266; 1872-6372
• DOI: 10.1016/j.jbankfin.2022.106413

•The Fed's corporate bond programs helped stabilize private bond yields.•The programs’ backstop effects prevented corporate spreads from soaring.•The Fed's corporate bond programs cushioned the COVID Recession. In the financial crisis and recession induced by the Covid-19 pandemic, many investment-grade firms became unable to borrow from securities markets. In response, the Fed not only reopened its commercial paper funding facility but also announced it would purchase newly issued and seasoned corporate bonds rated as investment grade before the Covid pandemic. We assess the effectiveness of this program using long sample periods, spanning the Great Depression through the Great and Covid Recessions. Findings indicate that the announcement of corporate bond backstop facilities helped stop risk premia from rising further than they had by late-March 2020. In doing so, these backstop facilities limited the role of external finance premia in amplifying the macroeconomic impact of the Covid pandemic. Nevertheless, the corporate bond programs blend the roles of the Federal Reserve in conducting monetary policy via its balance sheet, acting as a lender of last resort, and pursuing credit policies.