Bond Price Fragility and the Structure of the Mutual Fund Industry
We show that mutual funds with a large share of a bond issue sell their holdings of that issue to a lower extent when they experience redemptions, arguably because they attempt to avoid a drop in the bond price and the consequent negative spillovers on the unsold part of their position. Hence, ownership concentration limits bonds’ exposures to flow-induced fire sales. We exploit exogenous variation in the negative spillovers of forced sales arising from the Fed’s SMCCF to confirm the economic mechanism. We also explore our findings’ implications for fund performance and the stability of the bond mutual fund industry.
Bonds, Mutual Funds, Fire Sales, Fed, Corporate Quantitative Easing, COVID-19 Pandemic, Secondary Market Corporate Credit Facility (SMCCF)
SMU Cox: Finance (Topic)