The Announcement Effect of Monetary Policy on the Corporate Bond Markets

Abstract

This study investigates the impact of the central bank’s monetary policy announcements on the perceptions of yield spread in corporate bond markets under the event of extreme events. These results highlight that the coronavirus pandemic has caused a market panic in the global economy. This caused investors to withdraw their money from bond markets, which caused a liquidity crisis in bond markets. The Fed announcements caused statistically significant tightening on US and global investment grades and high-yield corporate bond spreads. The Euro investment grade and high-yield corporate bond spread narrowed when the Fed took additional actions to provide more funds and expanded the buying scope to support market liquidity. These results suggest that forward guidance that emphasizes the Fed’s monetary policy causes stronger information effects.