Investor Sentiment and the Cross-Section of Corporate Bond Returns

Abstract

This paper constructs an investor sentiment measure at both individual bond and aggregate levels, uncovering the first evidence that investor sentiment has strong predictive power for the entire cross-section of corporate bond returns. We find that high bond investor sentiment leads to low future returns. A portfolio that longs low sentiment bonds and shorts high sentiment ones generates an average monthly return of 0.64% for high-quality bonds, and 1.57% for speculative-grade bonds. The results are robust to controlling for various risk factors and bond characteristics. The cross-sectional predictability of bond returns is countercyclical, and appears to stem from its predictive power for macroeconomic conditions.