How central bank swap lines affect the leveraged loan market

The cost of borrowing U.S. dollars through foreign exchange (FX) swap markets increased significantly at the beginning of the Covid-19 pandemic in February 2020, indicated by larger deviations from covered interest rate parity (CIP). CIP deviations narrowed again when the Federal Reserve expanded its swap lines to support U.S. dollar liquidity globally—by enhancing and extending its swap facility with foreign central banks and introducing the new temporary Foreign and International Monetary Authorities (FIMA) repurchase agreement facility for foreign and international monetary authorities. Recent research by Meisenzahl, Niepmann, and Schmidt-Eisenlohr (2020) shows how wider CIP deviations result in higher borrowing costs for U.S. corporations in the leveraged loan market. In this article, we discuss this finding, which suggests that, besides other channels, the Federal Reserve’s initiatives to provide global U.S. dollar liquidity contributed to easier financial conditions for U.S. corporate borrowers.