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Why Did the Recent Oil Price Declines Affect Bond Prices of Non-Energy Companies?
Oil prices plunged 65 percent between July 2014 and December of the following year. During this period, the yield spread?the yield of a corporate bond minus the yield of a Treasury bond of the same maturity?of energy companies shot up, indicating increased credit risk. Surprisingly, the yield spread of non?energy firms also rose even though many non?energy firms might be expected to benefit from lower energy?related costs. In this blog post, we examine this counterintuitive result. We find evidence of a liquidity spillover, whereby the bonds of more liquid non?energy firms had to be sold to satisfy investors who withdrew from bond funds in response to falling energy prices.
AUTHORS: Sarkar, Asani; Brandon Li