N°25-100: Passive Ownership and Corporate Bond Lending

Passive funds' increased ownership of corporate bonds reduces the demand to borrow these bonds, thereby easing short-selling constraints in the corporate bond market. This finding contrasts with evidence in the equity market, where passive ownership increases borrowing demand. The difference arises because, in the bond market, short sellers are mainly dealers rather than speculative customers.  Since passive ownership compresses credit spreads, the higher bond valuation reduces the buying pressure of active investors and consequently diminishes the need for dealers to borrow bonds for market-making activities.  Our results caution against extending the findings and implications in the equity short-selling literature to corporate bonds.