Does Secondary Market Liquidity Affect the Economy?

In response to COVID-19, the Federal Reserve’s Secondary Market Corporate Credit Facility (SMCCF) purchased corporate bonds and ETFs in secondary markets to “support credit to employers by providing liquidity.” Using a difference-in-differences analysis, we compare firms with bonds purchased by the SMCCF to similar firms whose bonds were not purchased. The SMCCF improved bond liquidity however it did not significantly change cost of capital, investment, or employment. Moreover, the real effects of ETF purchases were smaller than direct purchases because ETF trades have limited pass-through to underlying bonds. The results suggest improvements to secondary market conditions have limited economic effects.