Exploring the Sensitivity of Corporate Bond Yield Spreads to Changes in the Yield Curve

Abstract

Previous empirical work suggests that, when using corporate bond indices, the yield spread sensitivity of corporate bonds to changes in the yield curve is negative and significant, especially for the A and BBB-rated bond categories. We use a sample of 5500 US corporate bonds to construct bond indices from six credit rating categories. We confirm the findings of previous empirical studies. But, also, we find that the yield spreads on AAA and AA-rated bond indices have positive relationships with changes to the yield curve, suggesting heterogeneity in sensitivities across bond rating categories. We then analyse the yield spread sensitivity of individual corporate bonds in our sample. We find that, sensitivities vary across bond ratings categories, and within bond rating categories, sensitivities can vary significantly across maturity and economic sectors. Finally, we use information on bond sensitivities to create bond indices from within the set of A and BBB-rated bonds where the estimated sensitivities are either insignificantly different from zero or significantly positive. These results illustrate the power of the averaging process inherent in using broad bond indices to hide variation in sensitivities within the bond rating category.