Pierre-Olivier Weill

The COVID-19 pandemic has wrought havoc on the global economy. To cope with this unprecedented economic shock, many large US corporations turned to the $10 trillion corporate bond market. However, with the prospect of downgrades and possible defaults, along with widespread outflows from corporate bond funds, reports of illiquidity began to surface very early on: in mid-March, 2020, former Federal Reserve chairs Bernanke and Yellen described the corporate bond market as “under significant stress”, while a report from Bank of America deemed the market “basically broken”. In response, the Federal Reserve introduced several facilities designed to bolster liquidity and reduce the costs and risks of intermediating corporate debt, including the Primary Dealer Credit Facility (PDCF) and the Primary and Secondary Market Corporate Credit Facilities (PMCCF and SMCCF, respectively). The latter two facilities represented a particularly bold intervention, in that they allowed the Fed, for the first time, to make outright purchases of investment-grade corporate bonds issued by US companies, along with exchange-traded funds (ETFs) that invested in similar assets.

“Corporate Bond Liquidity During the COVID-19 Crisis” is an empirical study of trading conditions in the US corporate bond market in response to the large economic shock induced by the COVID-19 pandemic, as well as the impact of the unprecedented interventions that followed. This study is co-authored by a team including UCLA faculty as well as current and former UCLA PhD students: Mahyar Kargar (University of Illinois faculty, former UCLA Anderson PhD student), Ben Lester (Senior economic advisor at the Federal Reserve Bank of Philadelphia), David Lindsay (UCLA PhD student), Shuo Liu (Tsinghua University, former UCLA PhD student), Professor Pierre-Olivier Weill (UCLA faculty), and Diego Zúñiga (UCLA PhD student).

A key contribution of this study is to consider both the cost and the quality of intermediation services provided. More specifically, it distinguishes between two types of transactions offered by dealers. First, fast transactions called “risky-principal” trades, that occur when dealers trade immediately in and out of their bond inventory. Second, slow transaction called “agency” trades, that occur when dealers do not trade from their inventory, but instead try to locate a trading counterparty for their customers (acting very much like real estate agents).

Using data from the Trade Reporting Compliance Engine (TRACE) made available by the Financial Industry Regulatory Authority (FINRA) the study separately measures the costs of risky-principal and agency trades. As shown in the Figure, the cost of risky-principal trades increased significantly during the COVID-induced panic, reaching a peak of more than 200 basis points (bps), while the cost of agency trades increased much more modestly.  As the premium paid for risky-principal trades increased, the study documents that the fraction of total volume executed as agency trades increased by as much as 15% at the height of the sell-off. This implies that the average trade was not only more expensive, but also more likely to be of lower quality. This highlights the importance of studying both the cost and quality of intermediation services: simply measuring the behavior of average transaction costs during this period would underestimate the deterioration in market liquidity.

As trading shifted from risky principal to agency transactions, the study shows that, somewhat astonishingly, the dealer sector as a whole absorbed no inventory, on net, during the most tumultuous period of trading. Hence, when the demand for transaction services surged, it was customers themselves that ultimately stepped up to provide additional liquidity. In fact, it was only after the announcement of the Federal Reserve’s interventions that dealers began to absorb inventory onto their balance sheets, and trading conditions started to improve. Indeed, after the announcement of the Fed’s credit facilities until June 2020, the quantity of corporate debt held by dealers more than doubled, relative to pre-COVID levels. At the same time, the cost of risky-principal trades decreased significantly, to approximately double the levels observed before the pandemic.

To establish the causal effect of the intervention on market liquidity, the paper exploits restrictions on the types of bonds that could be purchased through the Fed’s corporate credit facilities: it shows that, immediately  after the announcement of the SMCCF, the cost of trading bonds that were eligible for purchase by the Fed decreased substantially, while the cost of trading ineligible bonds was essentially unchanged. Later, when the program was expanded in both size and scope, we show that the trading costs of all bonds fell. Hence the initial announcement induced dealers to purchase eligible bonds at a lower cost, while the expansion of the corporate credit facility appears to have relaxed balance sheet constraints more generally, making dealers less reluctant to purchase any bond.

Adriana Lleras-Muney

According to the Bureau of Labor Statistics, about 10% of workers today are unemployed. This rate however is at least twice as high among those ages 15-25. This pattern is not unique to today. In fact, youth unemployment rates have always been much higher than unemployment rates for the rest of the population, at least since 1948 when official statistics started reporting unemployment rates. For this reason, many federal and local governments around the world have designed and implemented youth training programs to help unemployed young people. Although there is a great deal of variety in the design of these training programs the basic idea is to provide youth with work experience in the hope this experience will help them in the labor market.

A large literature has investigated whether these programs are effective. The consensus today, based on hundreds of studies, including randomized experiments, suggest that these programs have at beast modest effects on the employment and wages of participants. In fact, many question whether these gains justify the cost, and have called for the elimination of these programs today. For example, the largest youth training program in the US today is Job Corps, a federal program that spends 1.7 billion dollars annually, has been deemed a failure by critics. However, most job training program evaluations focus only on short- and medium-term outcomes. In fact, most evaluations have only followed participants for less than three years. Moreover, they have considered impacts on employment and earnings only.

In Do Youth Employment Programs Work? Evidence from the New Deal (NBER Working Paper 27103), Professor Adriana Lleras-Muney and her co-authors (Anna Aizer, Shari Eli and Keyoung Lee) study the lifetime effects of the first youth training program in the US implemented during the Great Depression, when youth unemployment rates were estimated to be around 60%. She shows that just under 10 months’ enrollment in the Depression-era Civilian Conservation Corps (CCC) increased lifetime earnings for disadvantaged young men by an average of 4.6 percent, even though it had no measurable effect on short-run labor market activity. The CCC also improved long-term health and survival. CCC men who trained for one year lived almost one more year as a result.

Between 1933 and 1942, the CCC employed about 3 million men in 2,600 camps. Created to address high youth unemployment rates by providing “relief through work,” its laborers contributed to public works projects such as developing national parks, preserving forests, and construction of land irrigation systems. CCC enrollees were unemployed and unmarried men, who were American citizens aged 17 to 25 and in good health.

After completing six months of training in camps, CCC enrollees could reenlist for another three 6-month periods. Participants were paid $30 per month and were required to send $25 to a designated family member. Enrollees were posted in camps of about 200 people, where they received meals and medical treatment such as vaccinations. In addition, enrolled men could receive formal and informal schooling at the camps.

The data for the study were constructed using CCC administrative records in state archives of Colorado and New Mexico. The records include information on 28,343 men who enrolled in the CCC between 1937 and 1942, including dates of birth, family information, enrollment data, camp assignment, reason for separation from the program, and some physical data. The data were them merged to 1940 census records, WWII enlistment records, death certificates and Social Security Administration records.

For those who lived to age 45, an additional year of training increased the age at death by one year.  Life expectancy for this group was 73.6 years of life. Short-term employment results for the 4,000 men who participated in the CCC before 1940 and could be matched to the 1940 census showed that although training increased geographic mobility by about 15 percent, it had negligible effects on earnings or weeks worked. Individuals who trained for longer were not taller at the time of enlistment. But for the 5,500 men who could be matched to World War II enlistment records, a year of CCC training was associated with an additional inch in height, an indicator of better health.

Men who participate in the modern federal Job Corps (JC) program are similar to the CCC participants in age, duration of enrollment, and reasons for leaving the program.  Lleras-Muney and co-authors conclude that the lessons from the CCC may therefore carry over to current Job Corps participants.  Like CCC participants, JC participants obtained more education, reported being healthier and were more likely to move after their training. Thus, based on the CCC results, it is likely that JC participants will also live longer lives as a result of JC participation