Working Paper: CEPR ID: DP14344
Authors: Galina Hale; Julia Bevilaqua; Eric Tallman
Abstract: We document that positive association between corporate and sovereign cost of funds borrowed on global capital markets weakens during periods of unusually high sovereign yields, when some corporate borrowers are able to issue debt that is priced at lower rates than sovereign debt. This state-dependent sensitivity of corporate yields to sovereign yields has not been previously documented in the literature. We demonstrate that this stylized fact is observed across countries and industries as well as for a given borrower over time. It is not explained by a different composition of borrowers issuing debt during periods of high sovereign yields, by the relationship between corporate and sovereign credit ratings, and only partially explained by financial crises and IMF programs. We propose a simple information model that rationalizes our empirical observations: when sovereign yields are high, corporate yields are less sensitive to sovereign yields
Keywords: bond; debt; crisis
JEL Codes: F34; F36; F65; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Sovereign yields (H63) | Corporate yields (G12) |
| High sovereign yields (E43) | Sensitivity of corporate yields to sovereign yields (E43) |
| High sovereign yields (E43) | Corporate yields (G12) |
| Corporate yields (G12) | Sensitivity of corporate yields to sovereign yields (E43) |
| Sovereign yields (H63) | Information about creditworthiness of corporate borrowers (G33) |