Issuer Term Variability, Bond Yield Spreads, and Reaching for Yield

We examine how variations in nonfinancial terms across bonds from the same issuer, referred to as “issuer term variability” (ITV), relate to bond yield spreads, returns, and investor bases. Our findings show that ITV is positively associated with yield spreads, even after accounting for the issuer’s credit ratings and other credit risk proxies. Additionally, bonds with high ITV exhibit greater default risk but deliver lower risk-adjusted returns compared with those with low ITV. We also find that yield-seeking investors are more likely to own bonds with high ITV, and bond funds that reach for yield also tend to favor high ITV bonds. These results suggest that some investors specifically target high ITV bonds to achieve higher yields, even at the cost of lower returns. Further analysis indicates that reaching for ITV is difficult to justify as rational risk-taking by constrained investors.