COVID-19 Pandemic and Bond ETF Valuation Discount

The COVID-19 pandemic has had an initial and outsized negative impact on bond exchange-traded funds (ETFs), causing concerns for financial stability. Using a large panel of US bond ETFs, we conduct a comprehensive examination of the impact of the pandemic on ETF valuation discounts. We find the change in COVID-19 deaths to be significantly related to the valuation discounts of government bond ETFs and corporate bond ETFs, with investment-grade corporate bond ETFs showing greater sensitivity. These valuation discounts reversed dramatically after the Federal Reserve announced its intentions to purchase corporate bonds and bond ETFs. Government economic policies to combat the pandemic are also negatively related to the valuation discounts of corporate bond ETFs. These findings are evidence of the efficacy of broad-based liquidity support on restoring financial stability in the bond ETF market at a time of enormously stressed market sentiment and massive pricing dislocations.