Intermediary Balance Sheet Constraints, Bond Mutual Funds' Strategies, and Bond Returns

Authors

Mariassunta Giannetti, Stockholm School of Economics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Swedish House of FinanceFollow
Chotibhak Jotikasthira, Southern Methodist University (SMU) - Finance DepartmentFollow
Andreas C. Rapp, Board of Governors of the Federal Reserve SystemFollow
Martin Waibel, Stockholm School of Economics; Swedish House of FinanceFollow

Publication Date

6-6-2024

Abstract

We show that after the introduction of the leverage ratio constraints on bank-affiliated dealers, bond mutual funds have engaged in more liquidity provision in investment-grade corporate bonds, and their performance has benefited. However, the liquidity and returns of investment-grade corporate bonds have become more exposed to aggregate outflows from the bond mutual fund industry. This suggests that the inability of bond funds to purchase bonds exposed to leverage constraints impacts market functioning. We show that mutual funds' missing liquidity provision helps explain which bonds experienced more severe deterioration in liquidity and returns at the onset of the COVID-19 pandemic.

Document Type

Article

Keywords

Bond mutual funds, Intermediary Constraints, Corporate Bonds, Liquidity, Leverage Ratio

Disciplines

Finance

DOI

10.2139/ssrn.4607843

Source

SMU Cox: Finance (Topic)

Language

English