Impact of Monetary Policy on Bond Funds' Risk Taking

This technical report investigates the relationship between bond funds' risk-taking behavior and monetary policy. It addresses specific research questions, such as whether monetary policy influences the credit quality of bond fund portfolios and how the effects vary across different policy tools. The report presents key findings indicating that monetary policy significantly affects bond fund risk-taking, particularly through unconventional measures like asset purchases. The analysis reveals that the Federal Reserve's policies have a stronger impact on bond fund credit quality compared to the European Central Bank's measures. The report utilizes a comprehensive dataset, examining over 684,000 securities and approximately 5,000 US bond funds, to gauge risk-taking decisions. It also discusses the methodologies employed, including the calculation of risk scores based on credit ratings and the use of shadow rates to measure monetary policy effects. Overall, the findings highlight the varying impacts of monetary policy on bond fund risk profiles, with implications for investors and policymakers.