This paper studies whether central bank collateral frameworks play a stabilising role during large redemption shocks to investment funds. Using the “dash-for-cash” of 2020 as a case study, we find that funds with a higher share of ECB-eligible corporate bonds experienced lower redemption volumes, especially those with close affiliation to banks. We also find that asset managers followed a liquidation pecking order that reduced their allocation to eligible bonds by selling them to finance redemptions. These findings add an important nuance to previous studies of liquidity strain and selling pressure in the corporate bond market during the onset of the COVID-19 pandemic, indicating a greater willingness of dealers to increase their inventories of corporate bonds pledgeable with the ECB. Analysing the price impact of these portfolio choices, we also find evidence pointing to sustained price pressure for both ECB-eligible and ineligible corporate bonds. While the price impact is generally lower and less sustained for ECB-eligible bonds, the difference is primarily due to lower price pressure on bonds issued by banks. We discuss the broader implications of these findings for monetary policy transmission and financial stability as well as the policy debate on how central banks can better mitigate similar liquidity shocks in the future.
Journal of International Financial Markets, Institutions and Money, Vol. 109, 102292,
2026
