In his presentation, Tiange Ye introduced a novel empirical approach to understanding how the growing presence of passive investment vehicles shapes U.S. corporate bond markets. He began by documenting the significant rise in passive assets under management, emphasizing that passive funds grew from “roughly $50 billion to over $450 billion by the end of 2021” and now represent “about 8% of the market share” in investment-grade corporate bonds. This dramatic expansion raises important questions about whether passive fund activity affects pricing dynamics, liquidity, and even corporate financing decisions.
Ye explained that answering these questions is complicated by the fact that passive ownership and bond prices are jointly determined. To address this endogeneity problem, the research exploits a unique feature of corporate bond index construction: maturity-mandated passive funds may only hold bonds within specific maturity ranges. When a bond crosses a maturity threshold (such as moving from over 10 years to under 10 years to maturity) it becomes eligible for a different, often much larger pool of passive investors. This generates a predictable, discontinuous increase in passive demand. As Ye observed, this shift occurs because “long-term funds will sell and intermediate-term funds will buy” when a bond crosses the 10-year cutoff
Using this maturity-cutoff discontinuity, Ye and his coauthors identify clear secondary-market effects. Their analysis shows that when bonds newly qualify for a larger passive-investment category, they experience “a significant decrease in yield spread” of about three basis points, indicating a positive price impact. Liquidity also improves, with notable reductions in bid-ask spreads after crossing the maturity thresholds. Interestingly, while the price impact tends to reverse within several months (consistent with temporary price pressure) liquidity improvements appear more persistent.
The presentation further connects these secondary-market distortions to primary-market outcomes. By constructing an instrument reflecting time-varying passive demand, the authors demonstrate that firms with higher passive-ownership exposure face lower issuance costs. Ye reports that “a 1% increase in firm-level passive ownership will lead to 20 basis point reduction in the primary market issuing spread,” which translates to roughly 1.5 basis points per bond after adjusting for multiple outstanding issues. He also highlights that firms use shelf registration to issue bonds quickly and capitalize on these favorable conditions.
Beyond financing costs, the paper uncovers meaningful real effects on corporate balance sheets. Ye notes that after crossing the maturity cutoff, firms increase “the number of bonds outstanding, as well as the total long-term debt,” while simultaneously decreasing bank loan reliance, suggesting that companies substitute “more expensive bank loans with cheaper bond finance when there is a demand shock by passive funds”. Financially constrained firms, in particular, appear more responsive, showing relatively larger increases in investment following passive-demand shocks.