Treasury yields and corporate bond yield spreads: An empirical analysis Gregory R. Du�ee

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Publication date
January 1995

Abstract

previously circulated under the title The variation of default risk with Treasury yields This paper empirically examines the relation between the Treasury term structure and spreads of investment grade corporate bond yields over Treasuries. I �nd 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 �rst is that th...

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