Understanding Corporate Bond Spreads Using Credit Default Swaps

Alejandro Garcia and Jun Yang
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Jun Yang: Bank of Canada, https://www.bankofcanada.ca/

Bank of Canada Review, 2009, vol. 2009, issue Autumn, 27-35

Abstract: Corporate bond spreads worldwide have widened markedly since the beginning of the credit crisis in 2007. This article examines default and liquidity risk--the main components of the corporate bond spread--for Canadian firms that issue bonds in the U.S. market, focusing in particular on their evolution during the credit crisis. They find that, during this period, the liquidity component increased more for speculative-grade bonds than it did for investment-grade bonds, consistent with a "flight-to-quality" phenomenon. An important implication of their results for policy-makers seeking to address problems in credit markets is that the liquidity risk in corporate spreads for investment and speculative bonds behaves differently than the default risk, especially during crisis episodes.

Date: 2009
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