or example, the March 2020 dysfunction in the corporate bond market highlights the extraordinary fragility of a market that accounts for nearly 60% of the debt and borrowings of the nonfinancial corporate sector. Yield spreads over equivalent Treasuries widened further than at any time since the GC, with bond prices plunging even for instruments that have little risk of default. (See Liang for an excellent overview.)

You might think that the COVI shock would reveal fragilities through both a reduction in the perceived creditworthiness of borrowers (reflecting a decline of expected future cash flows) and an increase in required compensation for risk (say, due to a heightened correlation with consumption risks). Indeed, as the full force of the pandemic hit in March, it did prompt a wave of credit downgrades.

Yet, scholarly work suggests that the predominant sources of fragility were elsewhere. or example, dealers were reluctant to increase inventories while deep-pocketed market participants generally failed to step in. As a result, the cost of trading corporate bonds surged. It took the announcement of the ed’s willingness to intervene as a “market maker of last resortȁ to bring the market back to life. (See, for example, the discussions in Haddad, Moreira and Muir, O’Hara and Zhou, and Kargar et al.)