Inflation risk and yield spread changes

Diego Bonelli
Additional contact information
Diego Bonelli: BANCO DE ESPAÑA

No 2603, Working Papers from Banco de España

Abstract: Inflation risk explains a significant share of the systematic residual variation in yield spread changes beyond credit factors and intermediation frictions. Movements in expected inflation directly affect the real value of debt and, consequently, bond prices. I show that shocks to inflation expectations, volatility, and cyclicality – derived from inflation swap prices – are important determinants of yield spread movements. Load-ing patterns become more pronounced with higher ex-ante default risk and cash-flow flexibility but weaken with refinancing intensity. To rationalize the findings, I show that the same patterns emerge in a model of debt rollover risk with stochastic inflation and sticky cash flows.

Keywords: inflation risk; corporate bonds; yield spread changes; inflation-linked derivatives (search for similar items in EconPapers)
JEL-codes: G10 G12 G20 (search for similar items in EconPapers)
Pages: 78 pages
Date: 2026-01
New Economics Papers: this item is included in nep-mon
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.bde.es/f/webbe/SES/Secciones/Publicaci ... 26/Files/dt2603e.pdf First version, January 2026 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:2603

DOI: 10.53479/42345

Access Statistics for this paper

More papers in Working Papers from Banco de España Contact information at EDIRC.
Bibliographic data for series maintained by Ángel Rodríguez. Electronic Dissemination of Information Unit. Research Department. Banco de España ().