On 6 March 2020, the president of the Federal Reserve Bank of Boston, Eric Rosengren, urged that Congress should grant the Federal Reserve the authority to buy corporate bonds as part of its open market operations.1 On 23 March 2020, the Federal Reserve announced that it would buy up to $250 billion of investment grade corporate bonds in order to limit the deterioration of corporate financing conditions in the midst of the Covid-19 pandemic.
In the eventful intervening 17 days, investors had ‘dashed’ for cash and mounted a run on money market mutual funds which invest in commercial paper (corporate IOUs).2 In response, the Federal Reserve invoked its emergency lending powers, as it had in 2008, in order to buy commercial paper. It also reprised its underwriting of reissuance of maturing paper, setting a maximum spread over interbank rates. The Federal Reserve’s quick response stabilised the commercial paper market (where firms finance inventory and payroll).3
After the Federal Reserve backstopped money market funds, however, the run continued on corporate bond funds.4 Net redemptions from bond mutual funds exceeded $5 billion a day in mid-March (Figure 1). To meet these redemptions, fund managers dumped corporate bonds.
Figure 1 Flows to US corporate bond mutual funds (in billions of dollars, week ending the indicated day)
Source: McCauley (2020) citing Investment Company Institute, Collins (2020).
Ominously, many a bond exchange traded fund came to trade at a steep discount with respect to its net asset value (the total value of its individual bond holdings). In a strained market, savvy investors