Corporate Bond Liquidity During the COVID-19 Crisis

We study liquidity conditions in the corporate bond market during the COVID-19 pandemic. We document that the cost of trading immediately via risky-principal trades increased dramatically at the height of the sell-off, forcing customers to shift towards slower, agency trades. Exploiting eligibility requirements, we show that the Federal Reserve’s corporate credit facilities had a positive effect on market liquidity. A structural estimation reveals that customers’ willingness to pay for immediacy increased by about 200 bps per dollar of transaction, but quickly subsided after the Fed announced its interventions. Dealers’ marginal cost also increased substantially, but did not fully subside.