Abstract
We study the impacts of Secondary Market Corporate Credit Facilities (SMCCF) on US corporate bond market. Using foreign “Yankee” bonds as a control group that are ineligible for direct purchase of SMCCF, we find that SMCCF significantly reduces the yield spreads of US bonds. However, the impacts differ by bond ratings and remaining maturity with safer bonds (AA/A-rated) and short-term bonds (remaining maturity less than 5 years) benefiting the most from SMCCF. We find that neither liquidity conditions nor credit risk profiles can account for the widened yield spread difference between US bonds and their foreign “Yankee” counterparts. SMCCF improves liquidity for both US bonds and “Yankee” bonds. The CDS-bond basis of US bonds, nonetheless, increases relative to the “Yankee” bonds. Although SMCCF does not run through the bond market like an elephant and more resembles a bellwether driving bond investors, our results indicate that the distorted notion of credit risk due to its purchase pledge and the weakened information efficiency in the bond market can be concerning.
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