Macro Finance II
Sunday, Jan. 9, 2022 12:15 PM - 2:15 PM (EST)
- Chair: Janice C. Eberly, Northwestern University
Exorbitant Privilege? The Bond Market Subsidy of Prospective Fallen Angels
AbstractRisky firms just above the investment-grade cutoff face the prospect of becoming ``fallen angels' upon a downgrade. We show that these firms have benefited from investors subsidizing their bond financing costs since the Global Financial Crisis, especially during periods of monetary easing. We document two important consequences of the investor demand for bonds issued by prospective fallen angels. First, the subsidised firms grow disproportionately large and increase their market share by reducing the markup on their products. Second, the resulting spillover effects force their competitors to reduce employment, investment, markups, and sales growth.
The Rise of Bond Financing in Europe
AbstractIn the Euro Area, the share of corporate borrowing coming from bond markets doubled since 2000 at the expense of bank lending. We use micro-level evidence from European firms to dissect this aggregate growth and highlight potential risks behind the expansion, some of which came to light in spring 2020. First, the composition of bond issuers has shifted towards riskier firms: a stream of firms entered the bond market for the first time while being significantly smaller, more levered and less profitable than historical issuers. Second, entering the bond market implies a trade-off between growth and risk: new issuers borrowed to invest and grow, but at the cost of higher leverage and interest rates. Moreover, the majority of firms facing a credit rating downgrade in the 2020 crisis were small private firms that entered the bond market after 2012. In light of the recent turmoil, our findings support broadening lender-of-last resort policies to include the corporate bond market.
Corporate Loan Spreads and Economic Activity
AbstractWe study the predictive power of loan versus bond spreads for business cycle fluctuations.Using a novel credit spread measure derived from the secondary loan market, we show that loan market-based credit spreads have additional predictive power for macroeconomic outcomes compared to bond spreads as well as other credit spreads and equity returns, both in the U.S. and Europe. Differences in the composition of firms borrowing in loan or bond markets are important in understanding the differential predictive power of both credit spreads. Industry specific loan spreads predict different industry cycles and can be used to construct alternative weighting schemes which further improve the predictive power of loan spreads. Corporate bond purchases by the Federal Reserve at the beginning of the COVID-19 pandemic decreased corporate bond spreads while keeping loan spreads elevated, questioning the predictive power of the bond spread going forward.
University of California-Los Angeles
Bank for International Settlements
- G1 - Asset Markets and Pricing