Treasury yields and corporate bond yield spreads: an empirical analysis
No 96-20, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)
This paper empirically examines the relation between the Treasury term structure and spreads of investment grade corporate bond yields over Treasuries. I find that noncallable bond yield spreads fall when the level of the Treasury term structure rises. The extent of this decline depends on the initial credit quality of the bond; the decline is small for Aaa-rated bonds and large for Baa-rated bonds. The role of the business cycle in generating this pattern is explored, as is the link between yield spreads and default risk. I also argue that yield spreads based on commonly-used bond yield indexes are contaminated in two important ways. The first is that they are ``refreshed'' indexes, which hold credit ratings constant over time; the second is that they usually are constructed with both callable and noncallable bonds. The impact of both of these problems is examined.
Keywords: Government securities; Bonds (search for similar items in EconPapers)
Date: 1996, Revised 1996
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:96-20
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