The Causal Effect of the Fed's Corporate Credit Facilities on Eligible Issuer Bonds

We use a difference-in-differences framework to estimate the causal effects of the Federal Reserve's Primary and Secondary Market Corporate Credit Facilities (CCFs) on corporate bond credit spreads. In particular, we exploit the publication of the constituents of the SMCCF Broad Market Index to accurately identify eligible issuers and compare bonds of similar maturity and rating across differentially eligible issuers to measure the causal effect of the CCFs on eligible issuer bond spreads. We estimate that eligible issuer bonds enjoy an additional 51 bps to 85 bps reduction in spreads, relative to ineligible issuer bonds. This effect increases to between 71 bps and 115 bps of additional spread reduction when restricting bonds to maturities of less than five years, the maturity segment eligible for the SMCCF purchases. We also chronicle the response of eligible and ineligible bond spreads to key events. We find that both the absolute and relative response in bond spreads depend on the content of the Fed's policy announcements, as well as the particular securities being purchased. We find evidence of bond spread tightening due to improvements in bond liquidity on the initial CCF announcement date on March 23 for eligible issuer bonds, as well as at the start of SMCCF bond purchases on June 16 for ineligible issuer bonds. We contend that the portfolio re-balance channel may explain why ineligible issuer bonds experienced improvements in liquidity, despite not being the ones purchased.