Government Debt Maturity and Term Structure of Credit Spreads

Abstract

We investigate how government borrowing behaviors influence private sectors by exploring the relationship between government debt maturity and credit term structures. Using individual corporate bonds data between 1987 and 2015, we find that a longer government debt maturity is associated with a steeper credit term structure in both the primary and secondary corporate bond markets. An instrumental variable approach and an exogenous event study help us establish a causality. Our findings are more pronounced among riskier corporate bonds, and the influences of Treasury bond supply on credit term spreads are more pronounced near the maturity where this supply shock originates, suggesting that the credit risk and the maturity clientele channels together drive our findings.