Benchmarking the Effects of the Fed’s Secondary Market Corporate Credit Facility Using Yankee Bonds

Xu, Hui and Pennacchi, George (2021) Benchmarking the Effects of the Fed’s Secondary Market Corporate Credit Facility Using Yankee Bonds. Working Paper. Lancaster University, Department of Accounting and Finance, Lancaster.

Abstract

We use “Yankee” bonds, which are dollar-denominated bonds issued by foreign corporations but traded in the US, to benchmark the effects of the Federal Reserve’s Secondary Market Corporate Credit Facility (SMCCF). The SMCCF was established to purchase short-term, investment-grade bonds of US, but not foreign, corporations. Our tests apply a difference-in-differences technique to bond subsamples sorted by short- and long- maturities and AA, A, BBB, and BB credit ratings. Consistent with the SMCCF’s objective, we find that its announcement reduced the yield spreads on short-maturity US investment-grade bonds relative to the yield spreads on similarly-rated short-maturity Yankee bonds. Yet our results show that it also led to relatively lower yield spreads on US long-maturity AA- and A-rated bonds. Moreover, yield spreads on US BB-rated bonds actually rose relative to the spreads on their Yankee counterparts, indicating the SMCCF harmed these excluded bonds. Using the Amihud measure and bond-CDS basis as proxies for illiquidity, our analysis also shows that the SMCCF influenced both the illiquidity and default risk components of US bond yield spreads.