Bond Yield Spreads Research Articles

What drives liquidity in the Chinese credit bond markets?

We study the drivers and pricing of liquidity in the Chinese credit bond markets. We document that the liquidity and liquidity effects priced into yield spreads differ significantly across the four major credit bond categories and the two parallel trading venues: the interbank over-the-counter and exchange markets. We analyze the levels of liquidity and the pricing of liquidity effects into credit bond yield spreads using three counterfactuals: a collateral shock to repo eligibility, a crackdown on agent-holding activities, and four liberalization shocks on foreign investment. We identify the bond risk and macroeconomic channels as significant influences on liquidity effects but not the information channel. Our empirical findings are robust to a battery of tests.

Corporate Credit Risk and Bond Yield Spreads: Market Reactions to the Spreads

This article utilizes panel data from corporate bonds between 2014 and 2022 to explore the relationship between corporate credit risk and bond yield spreads. The findings indicate a positive correlation between corporate credit risk and bond yield spreads, a relationship that is mediated through market liquidity. Further analysis reveals that the impact of corporate credit risk on bond yield spreads is more significant in large corporations and in samples post-2018. These findings provide solid empirical support for corporate decision-makers to focus on corporate credit risk.

Management team categories, social network characteristics, and corporate credit risk

We investigate the association between the social networks of management team (AMT) and corporate credit risk using American corporate bond market data. We find that the social network size of AMT is significantly and positively related to corporate bond yield spreads, consistent with the risk-taking mechanism. In addition, the relative social networks of AMT to CEO and subordinate executives to CEO are significantly and positively related to bond yield spreads while that of middle managers to CEO have the opposite association. This implies that relatively greater social networks of subordinate executives could potentially influence the CEO to undertake greater risks, whereas relatively greater social networks of middle managers reduce corporate credit risk mainly through the information-sharing mechanism rather than the risk-taking effect since MM has no direct decision-making authority. Moreover, the variations in social networks among AMT are positively associated with corporate bond yield spreads, suggesting that an inequitable distribution of power among AMT members increases corporate credit risk. Additionally, we find that non-invesment-grade bonds, managerial entrenchment, information asymmetry, and overinvestment all intensify the positive association between AMT social networks and credit risk, namely enhancing the bondholders’ perceptions about the risk-taking mechanism of AMT social networks. Finally, our findings are robust after considering endogeneity concerns and alternative model settings.

Anatomy of sovereign yield behaviour using textual news

While the relationship between the information content of macroeconomic news and the behavior of asset prices has been studied extensively in the finance literature, this study provides a new perspective by examining the impact of textual news on sovereign bond yield spreads in an emerging country. This study used bond market news published in newspapers to develop the sentiment scores using a modified word dictionary to unravel news characteristics. A nonlinear regime-shifting regression model of Markov Regime Shifting (MRS) is used to understand the impact of news on sovereign bond yield spreads. The paper results show that textual news sentiment may explain both steepening and flattening of the yield curve, with monetary and fiscal policy news having the most significant impact on yield spread behaviour. The results hold key implications for policymakers, debt fund managers and other market participants.

From global tensions to regional integration: An analysis of bond market convergence in East Asia

Against the backdrop of the Russia–Ukraine (R–U) conflict, this paper investigates the convergence process of the bond market in East Asia from 2010 to 2024, focusing on the impact of the R–U crisis on bond yield convergence. Our findings show convergence toward both benchmarks, with an accelerated rate during the conflict. Malaysia, China, Indonesia, and the Philippines exhibit significant convergence toward Japan, particularly for long-term bonds, while the Philippines consistently converges toward the United States. Large discrepancies in interest rates and inflation spreads cause bond yield divergence, while geopolitical risk related to Russia narrows bond yield spreads, indicating a flight-to-quality effect. Conversely, global financial risk widens yield spreads to the U.S. benchmark but narrows them to Japan. This research highlights bond market convergence in East Asia amid geopolitical tensions, with significant implications for investors, policymakers, and researchers.

Search friction, liquidity risk, and bond misallocation

Search friction is a key driver of changes in corporate bond yield spreads over time. In the cross-section, the liquidity risk stemming from search friction is significantly priced, and is strongly correlated with the misallocation of bond positions among different traders. I propose a novel measure of bond-specific misallocation, which is the negative covariance between traders’ private valuations and their inventory positions for each bond. I find that bonds with higher levels of misallocation are associated with lower absolute levels of liquidity risk from search friction. I develop a search-and-matching model to explain this correlation.

Bond yield spreads and exchange market pressure in emerging countries

Bond yield spreads and exchange market pressure in emerging countries

A consumption-based term structure model of bonds and equity

In this study, I propose a consumption-based asset pricing model to capture the dynamic properties of term structures of bonds and equity. I extend the long-run risks model by introducing a mean-reversion of dividend growth and the external habit formation of a representative agent. The mean-reverting dividend growth generates a negative equity term premium, while the habit formation augments the equity premium and renders an upward-sloping bond yield curve, on average. In addition, fluctuations in the surplus consumption ratio and the conditional variance of consumption growth allow the model to reproduce pro-cyclical variations in bond and equity yield spreads and counter-cyclical variations in bond and equity term premiums, as observed in the U.S. data.

Buying into new ideas: the ECB’s evolving justification of unlimited liquidity

Abstract In 2012, Draghi put an end to rising euro area sovereign bond yield spreads by resolving to do ‘whatever it takes’. The crisis rhetoric and institutional practices of unlimited liquidity have since become commonplace, as countermeasures to recent market turmoil show. This article sets out to explain how and why ‘unlimited liquidity’ ideas moved to the ECB’s center of economic analysis during the euro crisis. Previous work fails to decipher that the ideational shift was highly anomalous when viewed against German ordoliberalism or scholarly support for ‘expansionary austerity’. Addressing this relative neglect in other accounts, we draw on qualitative text analysis and expert interviews to argue that this shift was due to norm entrepreneurs who capitalized on the uncertainty of the crisis. We employ constructivist arguments to identify four scoping conditions that account for the ascendance of ‘unlimited liquidity’: an indicative reference, credibility, institutional positioning and—as an extension to the literature—intellectual sensitivity. Our analysis suggests that the euro crisis changed economic ideas, and fundamentally remodels the constructivist framework for studying monetary policy in crisis times.

Readability of Pension Narrative Disclosures, Pension Regulatory Changes, and Corporate Credit Risk

We examine, using corporate bond yield spreads, whether and how the readability of pension narrative disclosures is associated with corporate credit risk. The empirical results show that lower readability of pension narrative disclosures is associated with higher bond yield spreads. This association is driven by theoretical mechanisms, including incomplete information, asset value volatility, and financial leverage. The implementation of SFAS No. 132R-1 and the Pension Protection Act (regulatory mechanisms) has strengthened this association. We also consider two potential mechanisms that weaken the association between the readability of pension narrative disclosures and bond yield spreads: bond seniority and collateralization and shorter duration of debt to pension liability. Furthermore, our results show that pension plan size strengthens this association, whereas the funded status, actual return on pension assets, and equity allocation of pension assets weaken this association. Lastly, the results still hold when considering endogeneity issues, controlling for the tones and the length of pension narrative disclosure, employing difference-in-differences analysis, and examining firms with defined-benefit pension plans only or those with newly issued bond observations.

“Whatever It Takes!” How tonality of TV-news affected government bond yield spreads during the European debt crisis

Were government bond risk premia affected by the media in addition to the effects of major events? Revisiting the European debt crisis, we analyze the role of television news in the rise and re-convergence of GIIPS bond spreads vis-à-vis Germany from 2007 to 2016. We use a dataset of more than one million human-coded news items from leading newscasts worldwide to identify over 25,000 news on the Eurozone and country-specific economic topics. Our findings emphasize the relevance of the tonality of news, such that an increasing share of positive (negative) news correlates with a decrease (increase) in spreads. Content-based endogenous clustering of news highlights the importance of news about institutions providing stability and “international financial support” to distressed countries in reducing bond spreads. Moreover, weekend news enables us to establish a causal link between country-specific news coverage and changes in spreads on the subsequent trading day.

Information content of credit rating affirmations

AbstractWe examine the economic determinants and informational effects of credit rating affirmations (i.e., the reiteration of past credit ratings) for a sample of US public firms from 1995 to 2020. We find that credit rating affirmations typically follow major corporate events and changes in firm fundamentals that increase information uncertainty about a firm's creditworthiness, suggesting that affirmations reduce uncertainty. We further document that rating affirmations provide value‐relevant information to equity and debt investors. Using a short‐window event study method, we show that equity investors react positively to rating affirmations and that information uncertainty around affirmations diminishes. These findings are more pronounced for firms with non‐investment‐grade ratings. We further show that our results strengthen for firms with greater pre‐affirmation information uncertainty. Finally, consistent with our information uncertainty reduction results from the stock market, we report that bond yield spreads decrease for affirmed firms. Again, the effect is more pronounced for firms with non‐investment‐grade ratings. In summary, we highlight the significant capital markets' effects of credit rating affirmations, an area that the literature has largely ignored.

Corporate Real Estate Values and Bond Yield Spreads

Corporate Real Estate Values and Bond Yield Spreads

A Note on the yield spread of Russian green bonds

A Note on the yield spread of Russian green bonds

“Whatever it Takes!” How Tonality of TV-News Affected Government Bond Yield Spreads During the European Debt Crisis

“Whatever it Takes!” How Tonality of TV-News Affected Government Bond Yield Spreads During the European Debt Crisis

State corporate tax changes and bond pricing: U.S. evidence

In this study, we empirically investigate whether and to what extent state tax changes may affect the cost of debt. We employ staggered changes in state corporate income tax rates in the U.S. as exogenous shocks and estimate the effects of these state tax changes on bond at-issue yield spreads. We find a significant and positive relation between bond yield spreads and state tax increases but an insignificant relation between bond yield spreads and state tax decreases. On average, tax increases result in an increase of 34 basis points in the average bond yield spread. In addition, we document that bond investors demand higher yield spreads because tax increases aggravate firms' default risk by increasing firm leverage and return volatility. Moreover, we extend our analysis to equity holders and report a negative relation between stock market reaction to bond issuances subject to state tax increases.

Bond default risk transmission through a common underwriter: evidence from China

Using samples of corporate bonds issued by Chinese A-share firms from 2014 to 2021, we examine whether information about bond defaults transmits to other bonds underwritten by a common underwriter. We document that during the underwriting process for a new corporate bond, if any prior bonds underwritten by the same underwriter have defaulted, the yield spread of the new corporate bond increases significantly. Specifically, such a new bond, on average, has a yield spread that is 16.8 basis points higher than one without a common underwriter. The results suggest that investors perceive the default risk of a new bond increases due to a deteriorated reputation of the underwriter. Additional analyses suggest that the adverse effect of the new bond yield spread is less salient when an underwriter has a strong reputation, is state-owned, or has foreign shareholding; the issuer is state-owned or dual listed overseas. Overall, default information in the bond market transmits through common underwriters.

Selective Default Expectations

Abstract This paper explores how selective default expectations affect the pricing of sovereign bonds in a historical laboratory: the German default of the 1930s. We analyze yield differentials between identical government bonds traded across various creditor countries before and after bond market segmentation. We show that, when secondary debt markets are segmented, a large selective default probability can be priced in bond yield spreads. Selective default risk accounted for one-third of the yield spread of German external bonds over the risk-free rate during the 1930s. Selective default expectations arose from differences in the creditor countries’ economic power over the debtor.

Delegated Bank Monitoring by Bond Investors: Evidence from Japanese Main Banks

We investigate whether bank monitoring based on private information in private debt reduces the reliance on public earnings information in public debt. We focus on Japanese main banks, which have a high ability to access the private information of borrowing firms by exploiting their position as both large creditors and shareholders. Previous studies show that the Japanese main bank has a strong incentive to monitor borrowing firms when they are performing poorly, while it never intervenes in their management as long as their financial performance is stable. We find that under stable financial conditions in bond-issuing firms, accrual quality is negatively associated with bond yield spreads. In contrast, when bond-issuing firms with a main bank have a high default risk, there is no relationship between accruals quality and bond yield spread. The results suggest that when a main bank has a stronger incentive to monitor its borrowing firms, bondholders are more likely to delegate the screening role to the main bank with private information, leading to a reduction in the reliance on firms’ public earnings information in bond contracts.

Company Group Affiliations and Corporate Bond Yield Spread: Study Non-financial Companies

This study examines the impact of corporate groups on corporate bond yield. The results of the study indicate whether related groups issue bonds with higher yield spreads than independent companies. In Indonesia, research is still limited to further analyse the impact of corporate groups, in particular, on bond yields. In this study, the study period was taken from non-financial services corporate bond issuances from 2013 to 2022, and a total of 328 series of conventional bonds from 48 non-financial services corporate and bank issuers were used.