The Structure of International bond risk differentials

Many previous studies of the U.S. bond market have focused on the yield differential, the difference in yields on corporate and government bonds of the same maturity. These studies have generally found consistent and significant relationships between the yield differential and macroeconomic variables, with the yield differential being a positive function of the level of interest rates and the inflation rate and a negative function of the change in economic activity.This study extends the analysis of yield differentials to major western countries. In general there appeared to be little consistent relationship in the structure of yield differentials across countries, except that the differential does appear to be a positive function of the level of interest rates. While the conclusions that can be drawn from the study are limited, due to data problems, it does appear that there is no consistent structure of bond yield differentials across countries. Consequently, our results indicate that we know little about the structure of yield differentials beyond the U.S. and that extrapolation of U.S. research to the bond markets of other countries must be executed with extreme care.© 1986 JIBS. Journal of International Business Studies (1986) 17, 107–118