July 1997

Treasury Yields and Corporate Bond Yield Spreads: An Empirical Analysis

Gregory R. Duffee

Abstract:

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.

Full paper (450 KB Postscript)

Keywords: Credit risk, yield spreads, business cycles

PDF: Full Paper

Disclaimer: The economic research that is linked from this page represents the views of the authors and does not indicate concurrence either by other members of the Board's staff or by the Board of Governors. The economic research and their conclusions are often preliminary and are circulated to stimulate discussion and critical comment. The Board values having a staff that conducts research on a wide range of economic topics and that explores a diverse array of perspectives on those topics. The resulting conversations in academia, the economic policy community, and the broader public are important to sharpening our collective thinking.

Back to Top
Last Update: February 19, 2021