Using transaction data from the first half of 2020, we examine the reaction of corporate credit spreads to the Federal Reserve’s monetary policy announcements We find evidence that the bond markets are segmented across credit ratings, which led to different initial reactions across bonds with different credit ratings but spread across various sectors of corporate bonds over the longer event window To quantify the default risk channel of quantitative easing, we apply the variance decomposition approach to credit spreads and find that a significant fraction of credit spread changes indeed correspond to reduced default risk caused by the corporate bond purchase program In contrast, we only find mixed evidence for the liquidity channel driving the market reaction
Corporate Bond Market Reactions to Quantitative Easing During the COVID-19 Pandemic