Abstract
We examine how corporate bond credit spreads react to Federal Open Market Committee (FOMC) announcements. FOMC change announcements (rate hikes or rate cuts) narrow credit spreads, while a no-change announcement leads to wider credit spreads. Reactions to FOMC announcements (especially cuts and no-actions) are particularly large for noninvestment-grade and short-maturity bonds. Our results hint at monetary policy as a possible candidate for macro determinants of credit spreads. Overall, the results partially support investors’ ambiguity aversion to FOMC inactions and the bond market’s greater attention to the Fed’s actions targeted at promoting growth and/or providing systemic liquidity.
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