I study the role of intermediary agency frictions in the cyclicality of lending by collateralized loan obligations (CLOs). CLOs’ cost of debt contains significant compensation for agency problems arising from CLOs’ discretion in trading. Agency problems intensify in volatile periods, raising CLOs’ cost of debt, and reducing the issuance of new CLOs. To mitigate this effect, CLOs issued in volatile periods restrict their discretion, which, however, also limits profitable trading. Using a structural model, I estimate that agency frictions can explain one-third of the steep fall in CLO issuance during volatile periods.

This study investigates how money market funds (MMFs), a $6 trillion industry, adjust portfolio strategies in response to investor flows and monetary policy changes. We show that increased flows lead MMFs to subsequently increase credit risk exposures, lengthen durations, and lower liquidity reserves. For monetary policy, a key determinant for MMF performance, we find that both elevated prevailing policy rates and expectation of rate hikes prompt MMFs to reduce risk, shorten duration, and increase liquidity. Moreover, we document that prime funds, with significant holdings in non-government securities and susceptible to investor runs, exhibit different strategies from government funds under certain monetary policy conditions: In ultralow rate environments, prime MMFs stay conservative and liquid, whereas government MMFs lengthen durations to stay afloat; amid rising monetary policy uncertainty, prime funds reduce risks and increase liquidity, while government funds shift towards longer-term securities that are less susceptible to adverse impact from interest rate movements.

We document aggregate outflows from corporate bond mutual funds days before and after the announcement of increases in the Federal Funds Target rate (FFTar). To rationalize this phenomenon, we build a model in which funds’ net-asset-values (NAVs) are stale and investors strategically redeem to profit from the mispricing when they learn about the increases of FFTar. Consistent with the model's predictions, we find that stale NAVs and loose monetary policy environments weaken (strengthen) outflows sensitivity to increases in FFTar during illiquid (liquid) market conditions. Our results highlight when and how monetary policy could systematically exacerbate the fragility of corporate bond funds.