Bond Price Fragility and the Structure of the Mutual Fund Industry
We conjecture that mutual funds with large shares of outstanding bond issues should be more inclined to internalize the negative price spillovers of fire sales and should thus sell their holdings in those issues to a lower extent when they experience redemptions. We provide evidence consistent with this conjecture and show that ownership concentration limits bonds’ exposures to flow-induced fire sales. We exploit variation in negative spillovers arising from the Fed’s SMCCF to confirm the economic mechanism and explore our findings’ implications for fund performance and fire-sale spillovers to other funds.
Bonds, Mutual Funds, Fire Sales, Fed, Corporate Quantitative Easing, COVID-19 Pandemic, Secondary Market Corporate Credit Facility (SMCCF)
SMU Cox: Finance (Topic)