Bond Market Crises and International Lender of Last Resort

As pandemic fears gripped investors in March 2020, foreign officials, US leveraged funds and US bond funds all dumped US bonds. This massive selling severely strained the working of the US bond market.

In a new book chapter in Fault Lines after COVID-19: Global Economic Challenges and Opportunities, Robert N. McCauley discusses the response of the US Federal Reserve (Fed) during this bond market crisis and how its actions can inform future potential responses from institutions like central banks during times of crisis. 

McCauley explains that the Fed opened its discount window to primary dealers and bid without limit for Treasury bonds. It also took the unprecedented step of buying US corporate bonds. This purely domestic buying of last resort stabilized the global market for dollar bonds, reversing investor sales of international dollar bonds and boosting their prices. In this case, US domestic operations sufficed to steady global dollar markets. In a future crisis centered on the capital market rather than banking, central banks could use swap lines to fund concerted official buying of bonds.