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What Explains the Recent Increase in Canadian Corporate Bond Spreads

Author

Listed:
  • Maxime Leboeuf
  • James Pinnington

Abstract

The spread between the yield of a corporate bond and the yield of a similar Government of Canada bond reflects compensation for possible default by the issuing firm and compensation for additional risks beyond default. Using the approach proposed by Gilchrist and Zakrajšek (2012), we find that roughly two-thirds of the total 1.2-percentage-point increase in corporate bond spreads from July 2014 to September 2016—a period when oil prices were low—is due to higher compensation for possible default. Default risk explains most of the increase of spreads for energy and high-yield firms but explains almost none of the increase for financial and investment-grade firms. This suggests that liquidity risk and other factors beyond possible default affected spreads of financial and other investment-grade firms.

Suggested Citation

  • Maxime Leboeuf & James Pinnington, 2017. "What Explains the Recent Increase in Canadian Corporate Bond Spreads," Staff Analytical Notes 17-2, Bank of Canada.
    • Handle: RePEc:bca:bocsan:17-2
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    File URL: https://www.bankofcanada.ca/wp-content/uploads/2017/03/san2017-2.pdf
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    Citations

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    Cited by:

    1. Maxime Leboeuf & Daniel Hyun, 2018. "Is the Excess Bond Premium a Leading Indicator of Canadian Economic Activity?," Staff Analytical Notes 2018-4, Bank of Canada.
    2. Rohan Arora & Chen Fan & Guillaume Ouellet Leblanc, 2019. "Liquidity Management of Canadian Corporate Bond Mutual Funds: A Machine Learning Approach," Staff Analytical Notes 2019-7, Bank of Canada.
    3. Nusrat Jahan, 2022. "Macroeconomic Determinants of Corporate Credit Spreads: Evidence from Canada," Carleton Economic Papers 22-07, Carleton University, Department of Economics.
    4. Guillaume Ouellet Leblanc & Maxime Leboeuf, 2019. "Bridging Canadian Business Lending and Market-Based Risk Measures," Staff Analytical Notes 2019-26, Bank of Canada.

    More about this item

    Keywords

    Financial markets;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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