The Response of Corporate Bond Yields to Quantitative Easing: Implications of the Default Risk and Liquidity Channels in the United States

Ethan Barteck


As part of its response to the financial panic during the Sub-prime mortgage crisis, the Federal Reserve in the United States partook in unconventional monetary policy through large-scale asset purchases known as quantitative monetary easing (QE). These actions aimed to improve liquidity and credit conditions in the economy by increasing the amount of total reserves in the financial system. The Fed directly purchased treasury and mortgage backed bonds, but due to changes in liquidity and credit, QE also influenced corporate bonds. This paper brings attention to how corporate bonds with different credit ratings responded differently to QE in the US. As reserves increase, yields on bonds fall. This paper found that the declines in yields are conditional on a corporate bond’s credit rating. Due to the improved credit conditions, the low rated CCC corporate bonds benefited more than higher rated BBB bonds and these benefited more than AAA bonds. This result shows that QE operates through both a default risk and liquidity channel. As the United States and other developed countries responded to this economic downturn swifter and with larger measures than ever before, this research will help institutional investors and corporations better respond to Fed actions.


bond yields; Quantitative Easing; default risk; signaling

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