High-Yield Bond Markets During the COVID-19 Crisis: The Role of Monetary Policy

Abstract

This article documents the difference in corporate bond issuance between the euro area (EA) and the United States (US) in 2020, especially in the high-yield (HY) segment, and discusses the role that the monetary policy measures undertaken by the US Federal Reserve (Fed) and the ECB in response to the Covid-19 crisis may have played in explaining such difference. We document that the issuance of HY bonds since February 2020 has been lower by historical standards in the EA than in the US. The Fed’s measures aimed at the HY segment, mainly the purchase of HY bond exchange traded funds (ETFs), could have reduced credit spreads and improved market liquidity, which in turn could have stimulated debt issuance. Alternatively, HY issuers in the EA may have faced better bank funding conditions due to the ECB’s targeted longer term refinancing operations (TLTRO) and to other measures by national fiscal authorities, leading such issuers to substitute bank credit for bond finance. The article discusses these possibilities and argues that they all may have played a role to a certain extent.