1932

Abstract

This article provides a critical appraisal of the March 2020 crisis in fixed income markets. We synthesize the main events, characterize what appears to be an emerging consensus on what caused the market breakdowns, summarize how the Federal Reserve's actions contributed to its resolution, and discuss potential lasting effects of the crisis. This review makes clearer the fragilities and interconnectedness that characterize the current fixed income market structure and their effects on liquidity provision. We argue that the current market structure, combined with the continued growth of Treasury markets, corporate and municipal bond markets, and particularly, mutual funds, raises the specter that periodic instability may remain a feature of fixed income markets.

Loading

Article metrics loading...

/content/journals/10.1146/annurev-financial-110821-020622
2023-11-01
2024-05-08
Loading full text...

Full text loading...

/deliver/fulltext/financial/15/1/annurev-financial-110821-020622.html?itemId=/content/journals/10.1146/annurev-financial-110821-020622&mimeType=html&fmt=ahah

Literature Cited

  1. Antoniewicz S, Collins S 2022. Setting the record straight on bond mutual funds’ sales of Treasuries. ICI Viewpoints Feb. 24
    [Google Scholar]
  2. Bao J, O'Hara M, Zhou X 2018. The Volcker Rule and corporate bond market liquidity in times of stress. J. Financ. Econ. 130:195–113
    [Google Scholar]
  3. Bessembinder H, Jacobsen S, Maxwell W, Venkataram K 2018. Capital commitment and illiquidity in corporate bonds. J. Finance 73:41615–61
    [Google Scholar]
  4. Bi H, Marsh WB. 2022. What did policy interventions fix in the municipal bond market—liquidity or credit? Work. Pap. 7596, Kansas City Fed. Reserve Bank Kansas City, MO:
  5. Board Gov. Fed. Reserve Syst 2020. Federal Reserve announces extensive new measures to support the economy Press Release Mar. 23. https://www.federalreserve.gov/newsevents/pressreleases/monetary20200323b.htm
  6. Board Gov. Fed. Reserve Syst 2021. Financial stability report Fed. Reserve Syst. Washington, DC: https://www.federalreserve.gov/publications/files/financial-stability-report-20211108.pdf
  7. Bordo MD, Duca JV. 2021. How the new Fed municipal bond facilities capped muni-treasury spreads in the Covid-19 recession NBER Work. Pap. 28437
  8. Boyarchenko N, Kovner A, Shachar O. 2020. It's what you say and what you buy: a holistic evaluation of the corporate credit facilities Staff Rep. 935, Fed. Reserve Bank New York:
  9. Brain D, De Pooter M, Dobrev D, Fleming M, Johansson P et al. 2018. Unlocking the Treasury market through TRACE. FEDS Notes Board Gov. Fed. Reserve Syst. Washington, DC: Sept. 28. https://doi.org/10.17016/2380-7172.2251
    [Google Scholar]
  10. Chavez-Dreyfuss G. 2022. Analysis: nagging U.S. Treasury liquidity problems raise Fed balance sheet predicament. Reuters Nov. 8. https://www.reuters.com/markets/us/nagging-us-treasury-liquidity-problems-raise-fed-balance-sheet-predicament-2022-11-08/
    [Google Scholar]
  11. Cheng J, Wessel D, Younger J. 2020. How did COVID-19 disrupt the market for U.S. Treasury debt?. Brookings, May 1. https://www.brookings.edu/blog/up-front/2020/05/01/how-did-covid-19-disrupt-the-market-for-u-s-treasury-debt/
    [Google Scholar]
  12. Chodorow-Reich G, Ghent A, Haddad V. 2021. Asset insulators. Rev. Financ. Stud. 34:31509–39
    [Google Scholar]
  13. Cooperman H, Duffie D, Luck S, Wang Z, Yang D 2022. Bank funding risk, reference rates, and credit supply Staff Rep. 1042, Fed. Reserve Bank New York: https://www.newyorkfed.org/research/staff_reports/sr1042
  14. Dick-Nielsen J, Rossi M. 2019. The cost of immediacy for corporate bonds. Rev. Financ. Stud. 32:11–41
    [Google Scholar]
  15. Duffie D 2012. Market making under the proposed Volcker Rule Unpublished manuscript, Stanford Univ. Stanford, CA:
  16. Duffie D 2020. Still the world's safe haven? Work. Pap. 62, Hutchins Cent. Fiscal Monet. Policy, Brookings Inst. Washington, DC:
  17. Falato A, Goldstein I, Hortascu A. 2021. Financial fragility in the COVID-19 crisis: the case of investment funds in corporate bond markets. J. Monet. Econ. 123:35–52
    [Google Scholar]
  18. Flanagan T, Purnanandam A. 2020. Corporate bond purchases after COVID-19: Who did the Fed buy and how did the markets respond? SSRN Work. Pap. 3668342. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3668342
  19. Fleming M, Ruela F. 2020. Treasury market liquidity during the COVID-19 crisis. Liberty Street Economics Fed. Reserve Bank New York: April 17. https://libertystreeteconomics.newyorkfed.org/2020/04/treasury-market-liquidity-during-the-covid-19-crisis/
    [Google Scholar]
  20. Gilchrist S, Wei B, Yue V, Zakrajsek E. 2022. The Fed takes on corporate credit risk: an analysis of the efficacy of the SMCCF SSRN Work. Pap. 3686961. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3686961
  21. Goldstein I, Jiang H, Ng D. 2017. Investor flows and fragility in corporate bond funds. J. Financ. Econ. 126:592–613
    [Google Scholar]
  22. Gyftopoulou L, Ritchie G. 2022. The pension problem that threatened to wreck the gilt market. Bloomberg Sept. 28. https://www.bloomberg.com/news/articles/2022-09-28/the-uk-pension-problem-that-threatened-to-wreck-the-gilt-market
    [Google Scholar]
  23. Haddad V, Moreira A, Muir T. 2021. When selling becomes viral: disruptions in debt markets in the COVID-19 crisis and the Fed's response. Rev. Financ. Stud. 34:5309–51
    [Google Scholar]
  24. Haddad V, Moreira A, Muir T. 2022. Whatever it takes? The impact of conditional policy promises Work. Pap., Univ. Calif. Los Angeles:
  25. Haughwout A, Hyman B, Shachar O. 2021. The option value of municipal liquidity: evidence from federal lending cutoffs during COVID-19. Staff Rep. 988, Fed. Reserve Bank New York:
  26. He Z, Nagel S, Song Z. 2022. Treasury inconvenience yields during the COVID-19 crisis. J. Financ. Econ. 143:57–79
    [Google Scholar]
  27. IAWG (Inter-Agency Work. Group Treas. Market Surveill.) 2021. Recent disruptions and potential reforms in the U.S. Treasury market: a staff progress report Staff Prog. Rep., Nov. 8. https://home.treasury.gov/system/files/136/IAWG-Treasury-Report.pdf
  28. Idzelis C. 2020. The corporate bond market is ‘basically broken,’ Bank of American says. Institutional Investor Mar. 19
    [Google Scholar]
  29. Kargar M, Lester B, Lindsay D, Liu S, Weil P-O, Zuniga D. 2021. Corporate bond liquidity during the COVID-19 crisis. Rev. Financ. Stud. 34:115352–401
    [Google Scholar]
  30. Li Y, O'Hara M, Zhou X 2023. Mutual fund fragility, dealer liquidity provisions, and the pricing of municipal bonds. Manag. Sci Forthcoming
    [Google Scholar]
  31. Liang JN. 2020.. Corporate bond market dysfunction during the COVID crisis and lessons from the Fed's response. Work. Pap. 69 Hutchins Cent. Fiscal Monet. Policy, Brookings Inst. Washington, DC:
  32. Ma Y, Xiao K, Zeng Y 2022. Mutual fund liquidity transformation and reverse flight to liquidity. Rev. Financ. Stud. 35:104674–711
    [Google Scholar]
  33. Milstein E, Wessel D. 2021. What did the Fed do in response to the COVID-19 crisis?. Brookings Dec. 12. https://www.brookings.edu/research/fed-response-to-covid19/
    [Google Scholar]
  34. O'Hara M, Rapp AC, Zhou X. 2022. The value of value investors SSRN Work. Pap. 4151934. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4151934
  35. O'Hara M, Zhou X 2021a. Anatomy of a liquidity crisis: corporate bonds in the COVID-19 crisis. J. Financ. Econ. 142:46–68
    [Google Scholar]
  36. O'Hara M, Zhou X 2021b. The electronic evolution of corporate bond dealers. J. Financ. Econ. 140:368–90
    [Google Scholar]
  37. Schrimpf A, Shin HS, Sushko V. 2020. Leverage and margin spirals in the fixed income markets during the Covid-19 crisis. BIS Bull. 2, Bank Int. Settl., Basel, Switz. https://www.bis.org/publ/bisbull02.pdf
  38. US Dep. Treas 2020. Treasury international capital data for January Press release Mar. 16. https://home.treasury.gov/news/press-releases/sm943
  39. Vissing-Jørgensen A. 2021. The Treasury market in spring 2020 and the response of the Federal Reserve. J. Monet. Econ. 124:19–47
    [Google Scholar]
  40. Weiss CR. 2022. Foreign demand for U.S. Treasury securities during the pandemic. FEDS Notes Board Gov. Fed. Reserve Syst. Washington, DC: Jan. 28. https://www.federalreserve.gov/econres/notes/feds-notes/foreign-demand-for-us-treasury-securities-during-the-pandemic-20220128.html
    [Google Scholar]
/content/journals/10.1146/annurev-financial-110821-020622
Loading
/content/journals/10.1146/annurev-financial-110821-020622
Loading

Data & Media loading...

  • Article Type: Review Article
This is a required field
Please enter a valid email address
Approval was a Success
Invalid data
An Error Occurred
Approval was partially successful, following selected items could not be processed due to error