Financial fragility in the COVID-19 crisis: The case of investment funds in corporate bond markets

Using daily microdata, we document major outflows in corporate-bond funds during the COVID-19 crisis. Large outflows were sustained over weeks and most severe for funds with illiquid assets, vulnerable to fire sales, and exposed to sectors hurt by the crisis. By provid-ing a liquidity backstop for their bond holdings, the Federal Reserve bond purchase pro-gram helped to reverse outflows especially for the most fragile funds. In turn, the program had spillover effects on primary market issuance and peer funds. The evidence points to a "bond-fund fragility channel" whereby the Fed liquidity backstop transmits to the real economy via funds. (c) 2021 Published by Elsevier B.V.