Topic: Mutual Fund Fragility, Dealer Liquidity Provisions, and the Pricing of Municipal Bonds

Speaker: Xing (Alex) Zhou, Principal Economist, Board of Governors of the Federal Reserve System

Date: March 30, 2022 (Wednesday)

Time: 10:00-11:30

Location: 4-101

Language: English

 

Abstract:

Against the backdrop of COVID-19, we study how the interactions of mutual funds and dealers introduce fragility to the municipal bond market and induce lasting market impacts. During the crisis, trading surges while dealers’ liquidity provision plunges for mutual-fund-held bonds, leading to greater price depressions in these bonds. Importantly, the crisis reshapes the market’s perceptions of mutual fund fragility risks, with the aftermath-yield spreads widening significantly more for bonds with greater mutual fund exposures. Such post-crisis pricing effects reflect dealers’ continued reluctance to provide liquidity for mutual-fund-held bonds and they are stronger for bonds whose mutual fund holders are more susceptible to investor runs.