Reaching for Yield and the Cross Section of Bond Returns

Qianwen Chen () and Jaewon Choi
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Qianwen Chen: Department of Risk Management, Bank of Communications, Shanghai 200120, China

Management Science, 2024, vol. 70, issue 8, 5226-5245

Abstract: Reaching for yield, which we define as an investor preference for higher-yield bonds at a given rating or for higher-rated bonds at given yields, is associated with inflated valuation and thus negatively predicts risk-adjusted returns. Controlling for ratings, alphas are lower for higher-yield bonds, whereas, controlling for yields, alphas are lower for safer-looking, higher-rated bonds. Future bond returns are particularly low when current interest rates are low and demand from yield-reaching investors increases. These bonds experience more frequent downgrades and defaults, suggesting that they are riskier despite their high valuation.

Keywords: reaching for yield; cross-sectional corporate bond returns; credit rating (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:70:y:2024:i:8:p:5226-5245

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