Treasury Yields and Corporate Bond Yield Spreads: An Empirical Analysis
Abstract: This paper empirically examines the relation between the Treasury term structure and spreads of investment grade corporate bond yields over Treasuries. I find that noncallable bond yield spreads fall when the level of the Treasury term structure rises. The extent of this decline depends on the initial credit quality of the bond; the decline is small for Aaa-rated bonds and large for Baa-rated bonds. The role of the business cycle in generating this pattern is explored, as is the link between yield spreads and default risk. I also argue that yield spreads based on commonly-used bond yield indexes are contaminated in two important ways. The first is that they are \"refreshed\" indexes, which hold credit ratings constant over time; the second is that they usually are constructed with both callable and noncallable bonds. The impact of both of these problems is examined.
File(s): File format is application/pdf http://www.federalreserve.gov/pubs/feds/1996/199620/199620pap.pdf
Part of Series: Finance and Economics Discussion Series
Pages: 35 pages