Heterogeneous Intermediaries and Bond Characteristics in the Transmission of Monetary Policy

Department: Finance

Speaker: Matteo Leombroni (Boston College)

Room: T117

Abstract

This paper studies the transmission of monetary policy to the corporate bond market. We show that the yields of bonds held by mutual funds are more responsive to corporate bond purchases by the central bank. We attribute this phenomenon to (i) systematic variations in the bond selection of heterogeneous intermediaries and (ii) market segmentation. Our findings reveal that central bank corporate bond purchases primarily influence credit spreads. As the mutual fund sector holds securities carrying higher credit risk, it naturally experiences a more pronounced impact. Additionally, due to market segmentations, bonds with similar risk but higher mutual fund shares may exhibit different price responses. As insurance companies and banks refrain from investing in certain securities, mutual funds are forced to intermediate them. This leads to a higher compensation for risk and stronger sensitivity to policy changes. We also find that both selection and market segmentations are crucial in comprehending the stronger effects of conventional monetary policy on bonds held by mutual funds vis-´a-vis bonds held by other investors.